Total Cost of the Procurement Process Group: A Key Performance Indicator

By Marisa Brown

September 13, 2018 at 9:43 AM

Procurement has made strides in moving from a back office spend center to becoming a strategic business partner by driving process improvements, cost savings, and enhanced customer and supplier relationships. With the recognition that the supply chain—and specifically procurement—can significantly affect an organization’s bottom line, many organizations are revamping their measurement systems to better evaluate supplier relationships as well as internal procurement effectiveness. More transparent and collaborative scorecards, dashboards, and business reviews have become compelling drivers of performance within many procurement departments.

Innovative technologies such as blockchain, robotic process automation, artificial intelligence, and machine learning are already making their way into organizations. Procurement has a key role in this evolutionary wave of business process management. For procurement, these new technologies can ideally free staff time for—and better support—more interesting, higher-value activities.

To successfully improve productivity, quality, and sustainable growth, an organization must first understand its current position and limitations in terms of costs, productivity, and efficiency. In a climate of rapid global innovation and technology changes in procurement, studying the metrics, practices, and strategies of top organizations can expedite the average organization’s progress and improvement. Organizations that use benchmarking effectively discover ways to reduce costs, as well as increase efficiency, profit, and performance. In the process, they learn how to make better-informed decisions and manage change more effectively.

Total cost to perform the procurement process group per $1,000 in revenue

Cost is the most traditional measure of process performance. Evaluating the total cost of the procurement process group can play a significant role when developing sourcing strategies, selecting suppliers, ordering materials, and helping to develop and manage suppliers. Total procurement cost is comprised of personnel, systems, overhead, outsourced functions, and other costs.

To draw accurate conclusions from benchmarking data, it is often necessary to normalize the data. Normalizing is the process of converting data to a common scale or common denominator (e.g., per unit), mitigating issues such as differences in organizational size, and it enables inferences about relative performance. Therefore, the normalized key performance indicator for procurement is the total cost to perform the procurement process group per $1,000 in revenue.

As Figure 1 shows, APQC’s Open Standards Benchmarking® data in procurement reveals a substantial difference between top performers and bottom performers (and even the median) with respect to the total cost of procurement. Bottom performers spend about nine times more for this process group than top performers. For organizations with $1 billion in revenue annually, this would result in a difference of about $17.8 million in expenses between top and bottom performance.

 

Total Cost to Perform the Procurement Process Group per $1,000 in Revenue

total cost figure 1.png

Figure 1

Of course, total procurement costs per $1,000 in revenue can vary from industry to industry, and Figure 2 shows some interesting differences in this metric for the 10 industries with the highest costs in APQC's research.

Median Total Cost of the Procurement Process Group per $1,000 in Revenue by Industry
(Top 10 Industries)

total cost figure 2.png

Figure 2

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Typical drivers that organizations examine when seeking to reduce process costs are:

s  Organizational structure (e.g., the impacts on cost of centralization versus decentralization),

s  Technology (e.g., how to leverage technology and automation to reduce costs),

s  Strategic outsourcing of non-core tasks, and

s  Key practices related to the process (people practices, procedures, protocols, etc.).

Additionally, costs can be reduced through process mapping to identify opportunities for improvements such as bottlenecks, redundancies, handoffs, lack of important process documentation, and opportunities to streamline activities.

One practice that can lead to long-term cost savings is increasing internal collaboration by involving procurement professionals earlier in the product development stage.

As part of procurement, tactically ordering materials may seem straightforward, but this is where many organizations incur much of their procurement costs. APQC research shows that almost half of all full-time-equivalent (FTE) employee time in procurement is allocated to ordering materials (Figure 3). Automating this tactical, often repetitive process can free up procurement professionals to focus on supplier relationship management and other value-added activities.

Allocation of Full-Time Equivalent Employees by Procurement Process

total cost figure 3.png

Figure 3

About APQC

APQC helps organizations work smarter, faster, and with greater confidence. It is the world’s foremost authority in benchmarking, best practices, process and performance improvement, and knowledge management. APQC’s unique structure as a member-based nonprofit makes it a differentiator in the marketplace. APQC partners with more than 500 member organizations worldwide in all industries. With more than 40 years of experience, APQC remains the world’s leader in transforming organizations. Visit us at www.apqc.org, and learn how you can make best practices your practices.



Tags: procurement performance procurement benchmarking procurement cost
Category: News Article

Marisa Brown

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Marisa Brown has more than 25 years of experience in business, research, writing, speaking, and consulting. Currently, she focuses on the in-depth needs of APQC’s members in supply chain management and product development as she develops and oversees APQC's supply chain management research agenda. She leads APQC’s supply chain team that conducts research to provide insights into benchmarks, best practices, and process improvements in supply chain planning, procurement, logistics, manufacturing, product development, and innovation.


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