The Power of Procurement
Now there's proof. Effective procurement and supply management can make a huge contribution to the bottom-line performance of your business.
By Francis J. Quinn -- Supply Chain Management Review, 12/1/2005
Procurement, purchasing, and now supply management. Whatever name you apply to the process of acquiring goods and services for your business, one thing is clear: it represents a huge dollar expenditure. How big? A new book on the subject called Straight to the Bottom Line puts the cost of all of those processes and activities associated with procurement at anywhere from 30 percent to as high as 70 percent in some industries like automotive and chemicals.
So given the numbers in play, one might logically conclude that companies universally treat procurement as a core competency—giving the top management attention and the resources that such a competency deserves. Sadly, that’s not always the case. And one of the reasons, say the experts, is that the value of a first-rate, strategically operated supply management function has never been clearly quantified.Intuitively, organizations may have recognized that excellence in procurement bears some relationship to superior performance. But they never had the data—or frankly the support from the top—to act on their intuition. That's all changed. Within the past year, several new research initiatives—each coming from different relevant perspectives—prove convincingly that excellence in procurement can lead to a host of proven, quantifiable business benefits. Lower operating costs, higher ROI, and a direct contribution to the bottom line are among the principal advantages that have been documented. But they’re not the only ones.
“The best-practice companies truly understand the power of procurement,” says Pierre Mitchell, a director at The Hackett Group, which recently concluded a major study on procurement practices. “The bottom line is that world-class companies continue to take a very different view of procurement, looking at it as an
investment rather than as a cost center,” says Mitchell. “This is how they generate the millions of dollars in additional savings that other companies don’t see.”
The 133% advantage
The Hackett Study, based on in-depth research into the procurement practices of more than 300 companies, found that world-class organizations generate 133 percent greater return on their investment in procurement than the average companies. (See Exhibit 1.) The researchers calculated returns by dividing spend savings (spend reduction attributable to procurement practices) by the total cost of procurement operations. This advantage translates to $3.6 million to the company’s bottom line for every $1 million in procurement operations costs, says study director Chris Sawchuk.
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