Why procurement matters to supply chain managers
By Patrick M. Byrne -- Logistics Management, 8/1/2007
Decades back, the procurement function was perceived as clerical and reactive—a cost center. Today, it's generally viewed as a strategic, proactive process, with real potential to impact profitability, corporate growth, and competitive advantage. In fact, a recent Accenture study confirms that a clear-cut business case can be made for “procurement mastery.”
After surveying 225 procurement and supply chain executives at leading companies across North America, Europe, and Asia we found that the overall benefits achieved by procurement masters are about 30 percent higher than those achieved by companies of lesser stature. And despite this advantage, masters' procurement organizations cost about half as much to run.
To reach this conclusion, the study first sought to develop criteria for defining procurement masters, midrange performers, and low performers. Our research team asked executives about 80 questions for each of six core components of procurement: strategy; sourcing and category management; requisition to pay; supplier relationship management; workforce/organization; and technology.
For example, in sourcing and category management, we asked executive respondents about formal supplier-collaboration processes (1 = minimal, 5 = extensive). For requisition to pay, we asked about the use of common requisition portals (1 = none, 5 = fully standardized). In this way, Accenture was able to create basic distinctions between low performers (17 percent of the survey population), midrange performers (67 percent), and procurement masters (16 percent).
The next step was relating each category (low, midrange, and master) to specific performance levels (benefits) attained by the 225 respondents' procurement organizations:
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Total cost of ownership savings (compared to “controlled, normalized spend”).
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The ratio between total cost of ownership reductions and procurement operating cost.
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Percentage of spend controlled by the procurement organization.
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Percentage of new product designs/introductions in which procurement has a material role.
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Share of suppliers managed through a formal process.
Who's A Master?
To begin, we confirmed that the most highly rewarded procurement practitioners were nearly always the masters, based on the above five performance-level categories. In other words, companies with the best performance scores were also shown to be the best strategists, the best at sourcing and category management, the best at supplier relationship management, and so forth.
We also determined that procurement masters achieve significantly higher savings than the balance of the survey population. As shown in the graphic, survey respondents qualifying as masters achieve savings equal to 10 times the cost of running their organizations. By contrast, the savings achieved by low performers are only four times their costs. Basically, masters spend half as much as low performers but save 30 percent more. For a company with $1 billion in controlled spend, this means a procurement master would incur costs of $8 million and savings of $82 million, while a low performer would incur costs of $16 million and savings of only $63 million.
Lastly, we learned that the organizational challenges procurement masters face often are less constrictive or severe than those faced by midrange performers or low performers. Naturally, this implies a more effective operation—one whose structure does not act as an impediment to the pursuit of greater savings or increased operational effectiveness. Perhaps the most dramatic example is “lack of authority to get things done.” Compared to procurement masters, low performers were almost three times more likely to cite this as a problem. Master-level organizations with tightly defined metrics and a clear hierarchy simply get things accomplished in ways that others cannot.
Why Mastery Matters
In conjunction with the survey, Accenture researchers also presented studies of companies' procurement practices and explained the characteristics of procurement mastery as it relates specifically to strategy, sourcing and category management, requisition to pay, supplier relationship management, workforce/organization, and technology.
However, the most important message is that the time and effort companies put into becoming procurement masters are rewarded by lower costs of ownership; more opportunities for continuous improvement; deeper, more fruitful relationships with suppliers; and the ability to materially improve other processes, such as new product introduction.
Even though some companies position it outside the supply chain mainstream, procurement must matter to today's supply chain leaders.
When masterfully executed, few other functions have the potential to contribute as much to corporate performance—the ability to increase revenues, control costs, grow profitably, and consistently outpace competitors.
The Next Generation Supply Chain
10/11/2009
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