Study reveals slowdown in procurement efficiency
A study by a firm that specializes in benchmarking indicates that, while cost efficiencies are still a high priority with procurement professionals, an inability or unwillingness to effectively use new technology has resulted in a stall in achieving those goals.
According to the study, conducted by Hackett Benchmarking/solutions, highly paid procurement managers and professionals are too often focused on transactional processing activity, reflecting a failure to leverage best practices.
"Efficiency improvements have lagged badly when compared with the cost reductions made by other 'knowledge-worker' areas, keeping the function from becoming a true value driver in the average organization," said Richard T. Roth, managing director of Hackett Benchmarking/solutions. "It's unfortunate because procurement has a window of opportunity to become more of a strategic player in many companies."
Overall average procurement cost as a percent of total purchased costs has dropped less than 5% in the past three years, from 1.04% in 1996 to 0.99% in 1999, he added.
Roth sees an opportunity for MRO distributors to work with their customers to implement best practices in their relationship and integrate processes. Best-in-class companies are integrating processes by building tighter bonds with suppliers and interlocking their processes. He used purchase orders as an example.
"Who has to sign the purchase order?" Roth said. "What information does that person need in order to sign it? What kind of items have to be attached to it? These are all parts of the process that can be streamlined. The same is true for invoicing, so the people in accounts payable have all the information they need."
Another of Roth's concerns is that, while some companies may be moving to technology to collect data, they have not customized the technology to their own environment. "They may have a lot of data," he said, "but it's not necessarily relevant to their vendors."
He also warns that, while the Internet could be a real advantage to distributors and their customers, it also can be a threat to those who don't take that advantage. He advises distributors to build a very tightly integrated process with their customers to make the Web a less attractive source for MRO products.
"Although buying MRO items through the Web may be a little bit cheaper, it often is difficult to get these purchases approved," he said. "It's difficult to manage the vendor relationship and get information such as on-time-delivery rates."
Best of the bestOther findings of the study include the following:
- The range between the lowest and highest procurement costs for the companies studied was quite wide, from an average of less than 0.83% per purchase in the top-performing quartile to more than 2% in the bottom quartile.
- First-quartile companies tend to use the same best practices, including automated procurement processes, reductions in the overall supplier base and development of supplier-performance measures.
- Procurement cards are typically underutilized, despite their potential for reducing the cost of making payment for small purchases by more than 85%. Although the use of such cards has quadrupled since 1996 to 18% of transactions, as many as 50% of such purchases could be handled this way. First-quartile companies use procurement cards for twice as many transactions as the average company.
- First-quartile companies stress better supplier management. On average, billion-dollar companies have contracts with 8,271 suppliers, down from 12,199 three years ago.
- Blanket purchase orders and long-term contracts, which can help reduce the overall number of transactions and associated paperwork, are also underutilized. While first-quartile companies use such arrangements in half of their transactions, fewer than one in three purchases are processed with blanket POs at the average company. At first-quartile companies, 61% of contracts are long term, vs. 37% at the average company.
- World-class procurement organizations of the future will have overall costs of less than 0.8% of purchased costs and fewer than 100 full-time employees per billion dollars of purchased costs. Only 10% of their suppliers will receive 90% of their business.