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Time is money in procurement.

To improve procurement, your firm will have to streamline lower value-added activities, leverage information and coordinate resources.

While procurement may be small in terms of staff, few other functions in the corporation control so much, or hold such promise for improving the bottom line. Smart companies recognize this tremendous potential.

Unlike the finance function, overall cost reduction isn't the immediate answer for unearthing greater value in procurement. The average billion-dollar goods producer spends only 1 percent of purchased costs to manage its 157-person procurement function; for service companies, 1.6 percent is average.

The impact is far greater when you bypass the cost issue and go straight to improving organizational effectiveness: Finding ways to boost procurement's spending efficiency just 2 percent could mean an increase of $100 million in shareholder value for a billion-dollar company. And in procurement, when effectiveness is attacked, addressing excess costs is concomitant.

Two challenges are keeping true procurement improvements beyond the reach of many companies. One is finding the time. Procurement spends the bulk of its effort on operational support activities, such as requisition and purchase order processing, supplier selection and material receipts processing.

With 76 percent of procurement's overall time focused on lower value-added activities, an appreciable number of managers and professionals engage in routine, day-to-day control and risk-management activities, rather than higher value-added decision sup port. In fact, the typical manager spends less than 2 percent of the time on effectiveness-boosting activities such as developing strategic alliances. While they believe they are as productive as possible, too often managers are drawn into solving operational support problems that eat away at the time they need to build strong procurement relationships and plan for the future.

The second challenge is leveraging information and coordinating resources. Approximately 56 percent of a corporation's purchases are not coordinated among all divisions and units. Rather, they're done on a decentralized basis, and information that can help optimize price and service isn't shared among business units.

Leading-edge companies are breaking free of traditional practices, transforming their processes in fundamentally different ways to overcome such challenges and realize the full potential of procurement.

World-class procurement organizations are redirecting where they spend their time by adopting simplified processes and procedures. They're gaining efficiencies by using best practices tools, such as encyclopedias of standard products from which requisitioners can select without procurement's involvement.

Another key tool is using purchasing cards for small-dollar transactions, which not only saves effort inside the procurement department but also has a profound impact on cutting the cost to pay suppliers. (See the box for sample best practices from leading procurement organizations.)

Quid Pro Quo

In terms of information, top-performing procurement departments are linking with finance to ensure an easy flow of information between the two organizations for processing payments in a simplified fashion with minimal problems. They're also sharing information across business units and building a knowledge base. Thus, the best opportunities in terms of price and service can be achieved by all across the firm.

In contrast, the average company is bogged down with almost 30 procurement systems per billion dollars of purchased costs, one of the largest numbers of systems within any department in the corporation. And these systems tend to be old, customized, complex and not highly integrated, thus hindering the information sharing that improves effectiveness.

The typical procurement department controls purchases that represent 40 percent of annual revenues. Even small improvements in effectiveness can drop huge sums to the bottom line. But achieving such gains remains beyond the immediate grasp of most companies. Without best-practice processes and streamlined information flows, they cannot be had.

Doing It Right

Best Practices in Requisition and Purchase-Order Processing

* Self-service requisitions using online and web-based item catalogs

* Automated general ledger account validation

* Automated budget availability verification

* Automated routing and approval verification

* Automated conversion of approved requisitions to purchase orders

* Blanket purchase orders for a large percentage of the total buy

* Procurement cards for most transactions under $1,000

* Procurement card transactions posted to a single general ledger account per procurement card

* Purchase orders submitted via electronic data interchange and/or supplier's intranets

Source: The Hackett Group
The Value of Streamlined Processes

 Measure Avg. Class

Requisition & POs processed $ 9.50 $ 1.87
PO processing annually

Material receipts Shipping receipts 13.03 2.74

Problem Problems resolved 36.57 6.89

Item & supplier Item & supplier 19.52 5.74
master file updates

Source: The Hackett Group and Financial Executives Institute

Mr. Hackett is president of The Hackett Group, based in Hudson, Ohio. All of the above statistics are from the ongoing procurement benchmark sponsored jointly by The Hackett Group and Financial Executives Institute. Visit for more information about the study.
COPYRIGHT 1999 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1999, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:benchmarking one's procurement organization
Author:Hackett, Greg
Publication:Financial Executive
Date:Jan 1, 1999
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