World-Class Procurement Generates More Than Twice ROI

World-Class Procurement Generates More Than Twice ROI

Companies that have world-class procurement organizations enjoy a number of competitive advantages.

According to a new study by The Hackett Group, Inc. these companies generate more than twice the return on investment. They also have 18% lower operating costs than typical companies, and operate with 28% fewer staff.

One key enabler of these organization is the ability to employ digital technologies to transform service delivery, reduce errors, and free procurement staff for higher-value work.

“For many years, world-class procurement organizations achieved dramatically better results than their peers by focusing on process optimization,” explained Chris Sawchuk, global procurement advisory practice leader.

“Technology has long played a role in helping these top performers standardize, simplify, and streamline their operations,” Sawchuk added. “But today, world-class procurement organizations are focusing much more broadly on digital business opportunities to maintain their performance advantage. They understand that cloud, mobile, and other digital business tools can allow them to truly transform the way procurement functions, including forecast and plan more accurately, collaborate with suppliers more effectively, and improve the experience for their customers.”

The Hackett Group’s research revealed a total of five strategies used by current world-class procurement organizations to achieve superior results: embrace digital transformation; reallocate resources from transactional focus to value adding; leverage analytics-based decision making; adopt stakeholder/customer-centric service design and delivery; and re-skill the procurement function.

“In just the past couple years, we have seen world class procurement organizations shift towards a complete digital experience for their business users, including a true move to a paperless environment and the ability to work from anywhere on any device," said Robert Derocher, sourcing and procurement practice leader.

“The “Amazon effect” on procurement is real and we are seeing it play out with our clients,” Derocher added. “As a result, companies are implementing new, integrated source-to-settle technology platforms, primarily in the cloud, and adopting new capabilities that enable the agility required by their customers and the marketplace.”

Metrics

World-class procurement organizations are those that achieve top-quartile performance in both efficiency and effectiveness across an array of weighted metrics in The Hackett Group’s comprehensive procurement benchmark.

Highlights from the study include:

As a percentage of total procurement spend, world-class procurement organizations spend 18% less on labor (by far the largest cost in procurement),

These companies also spend 13% more on outsourcing than typical companies.

They also generate a 9.5 times payback on investment versus 4.6 times for typical companies. (However this number is forecasted to rise only slightly for all companies over the next five years, as cost reductions and savings continue to level off.)

In addition to operating with dramatically fewer staff, world-class procurement organizations also allocate their staff very differently. They dedicate a significantly larger percentage of the overall staff to sourcing, supply base strategy and planning/strategic roles, and have a much smaller percentage of people focused on operations and compliance management.

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Material Handling & Logistics is an IndustryWeek companion site within Penton's Manufacturing & Supply Chain Group.


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