What makes a supply organization world-class? The Hackett Group, a business process advisory firm, has been regularly exploring that question in its Book of Numbers series, which offers benchmarking research showing where and how top-performing organizations are gaining more value from their procurement groups. Hackett's research covers metrics derived from 3,300 benchmark studies over 13 years at nearly 2,000 top companies, including 96 percent of the Dow Jones Industrials.
In its latest Book of Numbers report, Hackett reports that world-class procurement organizations — defined as those in the top quartile in both efficiency and effective performance — generate 133 percent greater return on their investment in procurement than typical companies, driving an additional $3.6 million to their company's bottom line for every $1 million in procurement operations costs. In addition, world-class procurement organizations show dramatically improved effectiveness over typical companies. They now operate with 46 percent fewer suppliers, are nearly five times more likely to be involved in enterprise-wide planning initiatives, and make much greater use of cross-functional teams for supplier sourcing, selection/negotiation and partnering/development.
Hackett found that while typical companies are narrowing the cost gap to world-class in procurement, world-class companies now see procurement operations costs that are 20 percent less than typical companies and have about half the procurement staff. But there are significant differences in how procurement leaders generate increased effectiveness and strategic business value in their enterprises.
"Yes, typical companies have narrowed the functional cost gap to world-class," says Chris Sawchuk, procurement practice leader at Hackett. "But all cost reductions are not created equal. In too many cases, typical companies end up cutting into high-value areas, like customer management, strategic sourcing, and supplier management and development. By contrast, world-class companies increase their focus on spend avoidance, develop deep partnerships with suppliers and minimize costs in low-value areas like transactional processes by adopting best practices in process, organization and technology."
I asked Sawchuk about one of the standout findings in the latest research, that world-class procurement organizations typically have a seat at the table when enterprise-wide initiatives are being planned. How are the top procurement executives getting that seat at the table? Are they invited into the room? Do they invite themselves?
Sawchuk suggests that part of the answer is, in fact, the character of a given executive: those with strong personalities balanced with strong interpersonal skills are more likely to be able to gain influence. In other words, executives who are effective and are able to demonstrate credibility not only get invited to dine at the table, but also to have a permanent seat at that table. And that calls for a different set of skills than has traditionally been required of highly effective, hard-negotiating, commodity-focused procurement managers. "To gain credibility in those meetings, it takes consultative skills to be able to understand the broader business issues and figure out how you can work together with the other executives in those cross-functional settings," Sawchuk says. It's not enough just to join the meeting, he adds, "Procurement executives have to be able to add value to the process."
The ability to line up the supply organization with the broader business' objectives is becoming an increasingly valuable skill as companies turn more and more to their supply functions to bring greater value to the bottom line. And Sawchuk believes that those supply executives who wish to rise to the top in the enterprise must be able to demonstrate that ability or face marginalization. "I've not seen leaders of procurement removed from their position due to not saving enough money," he says. "Where I have seen them taken out of their position is either from material shortages that impact earnings or, more importantly, where they have not been able to align themselves well enough with the businesses and functions they support."