5 Common References for Procurement Benchmarking
Procurement Benchmarking is one of the procurement best practices that an organization implements on its way to world class practices. Normally organizations benchmark other top performing organizations in order to provide a gap analysis to world class practices and then develop implementation plans to close the gap.
CAPS Research - Cross Industry Report of Standard Benchmarks provides a list of 20 commonly references for procurement benchmarks*. In this article you are going to find out what are the 5 procurement benchmarks regarding cost/spend, plus a resource that will show spend profile analysis at benchmark no. 4. Finally, at the end a surprise bonus regarding benchmarking studies by consultants.
1. Procurement Operating Expense as a Percentage of Total Spend
This figure is usually below 1% (at about 0.8%) of total spend. Now this figure in itself only shows that to be world class an organization’s procurement expense/cost needs to be less than 1% of total expenses/spend. However when looked with the next benchmark below it shows that in world class procurement organizations, the procurement function is a profit generating department.
2. Cost Reduction Savings as a Percentage of Total Spend.
Now this number is at an average of about 2% for all industries. Cost reduction implies savings that are realized by reducing the cost of same goods/services purchased as compared to the previous prices paid. Re-emphasizing the point made above, this 2% savings on total spend, shows that world class organizations have a minimum net profit of about 1% of total spend that goes to the bottom line i.e. direct profit of a company (2% cost reduction savings of total spend – 1% procurement operating expenses of total spend).
Important Note. If you are in the semiconductor industry however, the cost reduction savings are at more than 5%. So if you want to benchmark the best way is to benchmark against your industry and NOT on the overall average.
3. Average PO Processing Cost
The average for this cost is $429. Understand that when this cost is at $429, issuing a PO for an item that costs less than that results in a loss and waste of resources (that’s one of the reasons why you have procurement cards). What you should realize however is that the average PO processing cost is as high as $1,778 for engineering/construction and is below $200 for chemical, industrial manufacturing, metals & mining and pharmaceuticals.
4. Percentage of Active Suppliers Accounting for 80% of total spend.
This is at about 6%, i.e. on an average an organization will spend 80% of its money with only 6% of suppliers. This would be a great number for the CFO and CEO, so that to allocate more resources to managing, developing, partnering and negotiating with these top suppliers. This is what we call A suppliers (the other 2 groups are B & C suppliers). For a comprehensive understanding of how much time and effort you should focus with each, download this video-on-demand about how to do spend profile analysis.
5. Percentage of Total Spend Managed and/or Controlled by Procurement
The average spend that procurement controls is at 82%, with the lowest at 58% for pharmaceutical industries.
Last but not least, a Procurement Director or CPO must take the initiative to start benchmarking as soon as possible and report to the top management the results. That will provide the opportunity to track results to achieving world class practices in an organization.
This is better than a consultant coming in and doing a benchmark and then reporting to the top management that the procurement department lacks way behind on procurement best practices.
Or worst case scenario is that the Procurement Director goes the way Bob did. (Click here to register for the “Strategic Buyer Webinar” that starts with the story of Bob, the procurement director whose CEO hired a consultant to do a benchmark study).
* The data for this article are taken from the 2011 Survey. For the latest data for all 20 benchmarks go to http://www.capsresearch.org/research/benchmarking/Cross_Industry.aspx