The price of procurement

Wringing efficiency out of the supply chain could be as simple as investing in technology that will automate operational tasks, such as purchase order processing. That’s because smoother supply chain operations can allow companies to shift resources to more strategic tasks-such as sourcing-where they can find even more value, according to the Hackett Group.

In its latest “Book of Numbers” report, Hackett states that companies with world-class procurement operations spend US$1.4 million per billion of their overall procurement spend (the goods and services a company buys to do business) on technology, while average companies spend $1.1 million per billion of spend. (The Hackett Group defines “world-class” as those companies that achieve the highest scores in its measures for efficiency and effectiveness that take into account cost and productivity, and quality and value respectively.)

According to Hackett, world-class procurement organizations spend $7.4 million on procurement operations for every $1 billion of goods and services they buy. Average companies, on the other hand, spend $10.1 billion on procurement operations for every $1 billion of goods and services they buy. So even though world-class companies are spending more on procurement technology (in terms of dollars and as a percentage of procurement operations), their overall spending on procurement operations is actually less.

By automating operational processes in the purchase-to-pay cycle (processing of purchase orders, receipts, requests for quote and so on), world-class companies are able to focus resources and savings on strategic business operations, says Christopher Sawchuk, senior business adviser at Hackett. “The value of these [automation] investments is in cost reduction,” he says. “The savings allow procurement executives to spend a larger percentage of their budget on decision support rather than operational support and focus on aligning procurement with business strategy.”

Decision-support tools can help executives determine who their best and worst suppliers are so that they may adjust their procurement plans accordingly.

Best practices

1. Identify operational processes (payment processing and the like) that can be automated with e-procurement and e-sourcing tools and invest in those technologies.

2. Educate employees and business partners about the benefits of new procurement systems to ensure that they are used. Christopher Sawchuk, senior business adviser at the Hackett Group, says procurement executives should track how many transactions are going through the e-procurement system as an indicator of usage.

3. Shift into strategic mode once the return on automation investments is realized. This may mean investing in decision-support technologies, hiring staff with more sourcing experience and expertise, or both.World-class companies spend 27 percent more on procurement technology than average companies, but they spend 27 percent less on overall procurement operations.

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