Companies Can Save Over $50 Million per Billion of Spending By Focusing on Key Suppliers, According to The Hackett Group.

ATLANTA -- Reduce Number of Suppliers to Cut Procurement Costs, Build Strategic Supplier Relationships, Improve Purchasing Leverage

Executives can generate more than $50 million in savings per billion of procurement spending and also significantly cut the cost of the procurement function by reducing the number of suppliers they work with and focusing more spending with key suppliers, according to Procurement Book of Numbers(C) research from The Hackett Group, a business process advisory firm (NASDAQ:ANSR).

According to Hackett, world-class procurement organizations spend 27 percent less than typical companies on the procurement function and operate with 38 percent fewer staff. One key strategy world-class organizations use to accomplish this is complexity reduction, including reducing the overall number of suppliers and focusing spending on key suppliers. Hackett's research found that over the past eight years typical companies have significantly cut the number of suppliers with which they work. But world-class procurement organizations still have less than half the number of suppliers/billion of spending than typical companies.

The Hackett Group is a world leader in best practice research, benchmarking, and advisory services that empower executives to achieve world-class enterprise performance. Hackett offers analysis and insight backed by metrics derived from 3,300 benchmark studies over 13 years at nearly 2,000 of the world's leading companies, including 93 percent of the Dow Jones Industrials.

Hackett's new Book of Numbers analysis and research volume, "Optimizing a Return on Business Complexity: Performance Metrics and Practices of World-Class Companies", focuses exclusively on the issue of complexity and complexity reduction in procurement, as well as in finance, IT, HR, and other areas.

"Few companies still cling to the belief that working with a large pool of suppliers keeps cost down. The empirical evidence is unequivocally to the contrary," said Hackett Procurement Practice Leader Chris Sawchuk. "Procurement executives across the board are waking up to the potential cost savings of simplifying their supply base and associated processes. But world-class organizations have gone further. They have not rested on their laurels after picking the 'low-hanging fruit' of cost savings gained from quick-hit supply base reductions in low impact spending. Rather, they continue to pull away from the pack by working with suppliers to ruthlessly eradicate complexity in processes, specifications, organization and technology that increase total costs."

Potential for Dramatic Savings

Since 1996, typical companies have reduced the number of suppliers they work with by 36 percent, according to Hackett's research, from 12,199 suppliers/billion of spending to just 7,805. But today, world-class procurement organizations rely on just 3,408 suppliers/billion of spend, 55 percent fewer than typical companies.

Hackett's research found a direct correlation between a decrease in the number of suppliers/billion of spending and decreased total procurement cost as a percentage of spending. Each reduction of 2,000 suppliers/billion of spending generates savings of more than 5 percent of overall procurement costs. For example, by reducing the number of suppliers from 20,000 to 10,000, companies can net more than 2.4 million in savings/billion of spending. Hackett found that even companies without excessive numbers of suppliers can generate significant savings through this approach.

But Hackett found that reducing the supplier base has much more significant implications than simply reducing the cost of procurement operations. When companies reduce the number of their suppliers, they are able to focus proportionately more of their resources on building stronger, more strategic relationships, with the resulting effect that they are able to simultaneously gain purchasing leverage and lower the cost of ongoing supplier monitoring and management.

According to Hackett, if 80 percent of a company's annual spend is spread across 20 percent of its suppliers, every dollar spent on procurement translates into 2.1 dollars of spend reduction. For a typical company with $1 billion in spending, this translates into an annual spend reduction of $21.5 million derived from a $10.1 million investment in the procurement function.

While this return on investment is significant, Hackett found that it pales in comparison to the impact on companies that concentrate their annual spend across less than 2.5 percent of their suppliers. In this case, the ratio of spend reduction to procurement process costs is over 5 to 1. In other words, that same company could realize an annual spend reduction of $51.4 million, doubling the previous savings figure, and increasing the procurement function's return on investment to over 500 percent.

NOTE TO JOURNALISTS: A chart illustrating select findings described above is available on request, and will be distributed via Business Wire.

Hackett found that world-class procurement organizations embrace techniques to reduce complexity beyond supplier relationships in many other areas of procurement. For example, 100 percent of all world-class procurement organizations use both a company-wide item master file and company-wide commodity coding.

Hackett's Book of Numbers Series

The Hackett Group's research into world-class performance is compiled in its Book of Numbers series, which provides senior executives fact-based performance metrics and insights based on Hackett's extensive database of best practices and process metrics in procurement, finance, IT, HR, and other areas. Hackett Book of Numbers volumes are available exclusively to members of Hackett's Executive Advisory Programs -- premium-value, membership-based programs providing confidential advisor inquiry, best practices research, and peer learning opportunities.

More information on The Hackett Group is available: by phone at [phone]; by e-mail at [e-mail]; or on the Web at http://www.thehackettgroup.com.

About The Hackett Group

The Hackett Group, http://www.thehackettgroup.com, a business process advisory firm and an Answerthink company, is a world leader in best practice research, benchmarking and advisory services that empower executives to achieve world-class enterprise performance. Only The Hackett Group empirically defines world-class performance in sales, general and administrative (SG&A) and supply chain activities with analysis gained through 3,300 benchmark studies over 13 years at nearly 2,000 of the world's leading companies.

The foundation of Hackett's benchmarks, transformation services, and membership-based advisory programs is our proprietary database of Hackett-Certified(SM) Practices, approaches which are proven to correlate with superior performance metrics. This unparalleled knowledge repository enables Hackett business advisors to provide data, advice, and strategic insight with a level of integrity and authority available nowhere else. As of this writing, Hackett clients comprise 93 percent of the Dow Jones Industrials, 76 percent of the Fortune 100 and 90 percent of the Dow Jones Global Titans Index.

Hackett-Certified and Hackett World-Class Passport are service marks of The Hackett Group.

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