What Does “Best” Look Like in Procurement?

Spend Matters welcomes this guest post from Marisa Brown, director of research services at APQC.

"Second place is just the first place loser." —Dale Earnhardt, NASCAR race car driver

Thank you, Dale Earnhardt, for the reminder that everyone wants to be the best. But when it comes to procurement, what is best? What exactly does top performance look like?

To answer this question, APQC analyzed data from its Open Standards Benchmarking in procurement to determine how the top 10% of organizations compare to the rest in 4 core areas:

1.     cost effectiveness

2.     process efficiency

3.     cycle time

4.     staff productivity

The results indicate that there is a significant difference between top-performing procurement functions and others.

Procurement Costs. APQC’s data shows a large difference between the total procurement cost of top performers and that of other organizations. As the figure below illustrates, at the middle (or median), top performers spend $2.99 less per $1,000 in revenue than all other organizations on procurement activities. For an organization with $5 billion in annual revenue, this would result in a savings of $14.95 million in procurement cost associated with being a top performer.

APQC 1

Organizations aiming to reduce their procurement cost may want to conduct spend analysis, which APQC’s research shows is associated with a lower total cost of procurement. By examining what is being spent with which suppliers and whether those suppliers are meeting commitments, organizations can gain greater visibility into their expenditures. This can allow them to identify areas for cost reduction and process improvement.

Process Efficiency. To examine the efficiency of organizations’ procurement operations, APQC analyzed the number of procurement full-time equivalent employees (FTEs) per $1 billion in purchases (figure below). The gap shows that top-performing organizations need 85 fewer procurement FTEs per $1 billion in purchases than other organizations for the same process.

APQC 2

 APQC’s research has shown that the adoption of a supplier category management program is associated with the need for fewer FTEs for the procurement process. Supplier category management involves dividing suppliers into individually managed categories. These programs often result in closer relationships between organizations and their suppliers, which can reduce the number of procurement staff members needed.

Procurement Staff Productivity. To evaluate the productivity of organizations’ procurement staff, APQC evaluated the number of purchase orders processed per procurement FTE. The data shows that procurement FTEs at top-performing organizations process substantially more purchase orders. As the figure below illustrates, at the median, top performers process 2,900 more purchase orders per procurement FTE.

APQC 3

Processing purchase orders has traditionally been a labor-intensive activity. APQC’s research has found that standardizing functions across the purchasing organization is a key driver for increasing the number of purchase orders that can be processed per procurement FTE. Another driver is the adoption of online procurement systems that automate ordering and paying for materials. By reducing the amount of time spent processing purchase orders, organizations can reallocate staff to more strategic aspects of procurement such as developing supplier relationships.

Conclusion. APQC’s analysis of top performers in procurement reveals large differences in performance on key measures compared to the performance of the other organizations in APQC’s data set. The largest differences occur for procurement cost, process efficiency and staff productivity. APQC’s research has identified procurement practices that are associated with better performance on these key measures, but as organizations strive to be the best, they must ensure that efforts are well planned to enable employees to adopt necessary changes and recognize their benefit.

Voices (11)

  1. E:

    Quote: “However processing more purchase orders per full-time equivalent (FTE) employee is an indicator of a top-performing organization..”

    Yes, surely a very logical conclusion. That being said, I fail to see how this article addresses the very broad header of the article “What Does “Best” Look Like in Procurement?” …

    Although this article surely addresses the tactical and operational aspects of our world, perhaps this article should better be renamed to …

    “What does “Best” look like in Procurement’s back end Tactical Operations?”

    How can this be “What “Best” looks like in Procurement” not covering any of the Strategic front-end, let alone the advent of advanced Category management?

    Surely a nice slice of procurement, but just that – a slice of what truly makes Procurement best. I truly hope it’s not all in operations management as this article indicates, otherwise I think we’ll all need to rethink what we’re doing. IMHO

    1. Andrea Stroud:

      Hi E.

      Today’s sourcing and procurement function has the ability to be so much more than just the buying arm of the enterprise, focused only on getting the lowest cost. Shifting the focus to what the business needs to accomplish its goals can enable procurement to take into account elements such as supplier quality and reliability. By emphasizing efforts in categories that are critical to the business, the procurement and sourcing organization can build and manage supplier relationships that deliver results for the business.

      If you are looking for other research or best practices that look at more strategic aspects of procurement then you may want to check out APQC’s Supplier Category Management: Driving Value Through the Procurement Organization investigated study that examined how top-performing organizations manage purchasing through supplier categories.

      Here is a link to the overview of the report http://goo.gl/Ieuk7F .

      I hope this information helps.

      1. E:

        Thanks, Andrea. Much appreciated.

        And yes, that was precisely the exact point of my post. There is far more than just tactical procurement. Hopefully that is – otherwise we’re truly all just barking up the wrong tree. Yes, well familiar with the space of category management and strategic sourcing further upstream. Hopefully all of us are. Appreciate your input as well as the link to the category management content. Very best.

  2. Bitter and twisted:

    So the top performers were top at performing the performance indicators that indicate top performance.

    Question: What is the average po value and what does it mean?

  3. b&t:

    As Dale Earnhardt said : “Aaaarrrrghhhhh!!!!!”

    Show us the data or its all piss and wind.

    1. Marisa Brown:

      b&t, the data for this analysis came from APQC’s Open Standards Benchmarking in Procurement (www.apqc.org/benchmarking-portal/osb/procurement). APQC looked cost effectiveness, cycle time, staff productivity, and process efficiency measures. Using 19 key performance indicators (KPIs), the research team conducted factor analysis and reliability tests to identify the five KPIs that best captured performance in the four core areas. APQC then created a top performer scale to evaluate 514 organizations and identify the top 10 percent. This yielded a set of 51 top performers for procurement and a comparison group of the remaining 463 organizations.

  4. Peter Smith:

    Why on earth is processing more Purchase Orders a sign of a top-performing procurement organization? Way, way back in my first CPO role in 1990 my number one aim was REDUCING the number of POs procurement handled!

    1. RJ:

      I’m sorry but I fail to see why any of these measures indicate “top” performance. By these standards an organisation with $20 bn turnover employing one member of staff on a $20,000 salary, with line management placing 1m direct orders with suppliers with no negotiation or competitive bidding (to reduce the cycle time) would come up trumps. Makes me despair after more than 20 years trying to promote strategic sourcing, contract and relationship management.

    2. Marisa Brown:

      Hi Perter. You’re right. Processing more purchase orders is not a sign of a top-performing procurement organization. However processing more purchase orders per full-time equivalent (FTE) employee is an indicator of a top-performing organization. When an organization can process more orders with fewer FTEs, it indicates that those staff are more efficient.

      APQC calculates the number of purchase orders processed per procurement process FTE as follows:

      Total number of purchase orders (all forms or methods) processed per year/Total number of FTEs employed during the year to perform all aspects of the procurement function.

      1. Peter Smith:

        Marisa
        But my point is this. I don’t care how fast my people are at processing POs. I don’t want them processing POs AT ALL. With a very few exceptions it is not value adding work. Indeed, the faster then do it, the more clear it is that it isn’t value adding! I want to automate, to delegate, to catalogue… my procurement people should be finding ways for the external market to increase and develop the shareholder value of my enterprise. That does not come from processing POs I’m afraid. This is simply a bad measure – but find me a CPO from a top firm who disagrees and I’d love to have the debate!

        1. Andrea Stroud:

          Peter, you are right organizations that do not take steps to automate transactional processes simply cannot match the speed, efficiency, and effectiveness of those that do.

          Automation’s primary influence is on the efficiency of procurement staff. The adoption of automated purchase order processing allows procurement staff to be more efficient and productive. This in turn can reduce staffing costs associated with purchase order processing. It can also allow the organization to shift employees from the more basic task of processing purchase orders to more value-added activities within the procurement function.

          As a follow up to Marisa’s point regarding more purchase orders processed per FTE is a sign of a Top Performing organization, I agree with that statement. If an organization uses automation there is typically an FTE that is overseeing that automation. So if through automation an organization is processing more purchase orders with fewer FTEs it is a win for the organization. This doesn’t necessarily mean that each FTE is manually processing the purchase orders, but rather with the use of automation x amount of purchase orders are being processed per x amount of FTEs that you have in place.

          Please let me know if I can provide additional follow up to your question. This type of dialogue with supply chain practitioners and other supply chain researchers is invaluable.

          I hope this additional information helps.

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