Every year, hundreds of procurement organizations undertake some type of benchmarking effort that places them on a maturity curve or 2/2 graphic. The quality and results of these efforts vary dramatically, both based on who is doing the benchmarking and, of course, the quality of data feeding the efforts.
Most companies attempting such an effort consider questions around areas such as savings measurement, transactional compliance, procurement value contribution to the business, purchase order or invoice approval cycle time and the like. Many of these types of metrics are timeless and remain valuable. But taken alone, they often fail to capture how procurement’s overall contribution to the business is changing.
This is important stuff. Throughout its history, procurement typically cared about just a handful of issues: supply assurance, or keeping the production line open; reducing cost, or not overpaying for a given item or service; and, of course, ensuring some level of compliance to procurement policy by the business, such as transactional buying that reduces maverick purchases.
I should also note that, as one of the original architects of the “spend management” concept, I’m as guilty as anyone in driving procurement organizations to measure themselves around these areas. And I should also admit these approaches can be a good start. Yet these types of metrics and related KPIs dramatically limit procurement’s contribution to the business.
In manufacturing, for example, how is procurement contributing to innovation through encouraging and fostering supplier innovation to bring breakthrough products and features to market? Or in retail and apparel, how is procurement evangelizing a set of behaviors that is acceptable, on a world level, for sub-tier suppliers that previously knew only of local norms like teenage labor and 16-hour shifts? And how, in all cases, is capital — not just as inventory — flowing through the supply chain to create maximum advantage and reduced risk for the top-level buying organization itself without harming lower-level suppliers?
Most procurement measurement efforts have been largely disconnected from these broader ideas and concepts. But even the function itself observes this is changing. A recent snap poll by ISM and Spend Matters found that, between 2015 and 2018, cost reduction as a contributor to overall procurement performance measurement and value proposition will fall by 16%. At the same time, procurement’s contribution to areas such as balance sheet improvement, revenue improvement and tax expense reduction will increase by 10%, 21% and 34% in the same time frame.
This post is based on content from the Spend Matters Perspective Reframing Maturity Models: Empirical Perspectives On Radically Improving Procurement Performance.