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There are many things that set world-class procurement organizations apart from their average-performing peers. It may be working closely with suppliers to drive innovation and manage risks, or perhaps it’s collaborating with senior management on strategic initiatives.
According to a new report from The Hackett Group, world-class procurement organizations also have 29% fewer full-time workers on average, and they rack up 22% lower labor costs. But how is it that these organizations can achieve more with fewer full-time employees? One indispensable factor is digital technology, the report says.
Chasing Efficiency
Reading this report reminded me of the accomplishments of the most recent ISM/Thomasnet.com “30 Under 30” supply chain stars. For many of them, their use of technology to streamline processes and boost efficiency for their companies had won them a spot on the list.
For instance, Abhishek Dahiya had saved Dell more than 450 work hours a week by transforming the company’s reporting framework from Microsoft Excel based to a database accessible through an online portal. And Dan Kaskinen, the Megawatt Winner, had saved his former company $3 million through his work on creating and innovating processes.
I bring up the “30 Under 30” cohort because it can be telling to look at what the youngest generation of procurement and supply chain professionals are focusing on at work. Stamping out inefficiency and saving time wherever possible clearly appears to be one major trend.
Managing Labor Costs
By using digital technology to automate routine, time-consuming tasks, world-class procurement organizations are thus able to boost efficiency as well as decrease the cost of work activities. The Hackett report points out that for a company with a revenue of $10 billion, having a high-performing procurement team can mean up to $6 million in yearly savings.
Not only do world-class procurement teams spend less on labor, they also have a much lower annual turnover rate, at 1.7% compared with the 3.1% for the “peer group,” as the report describes more typical-performing companies. Three-quarters of world-class procurement organizations have some sort of employee retention plan, as opposed to just 38% of the peer group.
The above graph is particularly interesting, for it lets you see where exactly world-class procurement organizations saves on labor costs. The two groups have roughly the same number of full-time equivalents (FTEs) in every category but operations and compliance management. Responsibilities that fall under this latter category tend to be more constant, routine and thus more easily automated. Compare that with, say, managing supplier relationships or innovation.
Typical and world-class procurement organizations alike stand to benefit from digital transformation. For the former, it can speed up the process toward achieving world-class performance. According to the report, while it usually takes more than five years to become a world-class procurement organization, two years can be all that is needed to see “marked improvements.” Organizations that are already at world-class level can expect to see continued improvements in performance by breaking through stubborn cost plateaus.
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What about the core of Procurement Group’s mission – creating efficiency within procured products and services?
Studies (Ardent Partners’ 2017 CPO Rising and ATKearney’s Return on Supply Management Assets) both show that procurement teams generate on average 2%-3% cost savings while best-in-class (as defined by the studies) squeeze out just 3%-5% for every $1 billion in vendor spend.
But we all know the challenges with studies… when studying P&L data, it is often the case that vendor spend is either flat or increasing, suggesting that “paper” savings often fail to reach the P&L.
What sets a world-class Procurement organization apart? My vote is for organizations that deliver 15%-20% savings on every $1 billion in vendor spend at time of sourcing, and an incremental 5% – 10% thereafter.
Absolutely, the savings noted in many studies seem to be missing an impact on P&L. Love the definition of world class procurement Serge – “My vote is for organizations that deliver 15%-20% savings on every $1 billion in vendor spend at time of sourcing, and an incremental 5% – 10% thereafter.”