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?
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.
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’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.
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.