Procurement Drives Bottom Line

New IBM study says better procurement performance leads to higher profit margins—and other news from Nashville


IBM chose its annual Smarter Commerce Global Summit in Nashville this week to unveil the results of a study that says companies with high-performing procurement organizations drive better bottom-line results.

The 2013 Chief Procurement Officer Study, conducted by the IBM Institute of Business Value (IBV), highlights the business impact that Chief Procurement Officers (CPOs) can have on a company’s competitive advantage and profitability. It explores how top-performing CPOs can increase their influence over strategic business imperatives by driving efficiency and performance, introducing innovative new processes and uncovering new insight into supplier networks that have a measurable effect on the bottom line.

According to the study, organizations with high-performing procurement departments reported profit margins of 7.12 percent, compared to 5.83 percent for companies with low-performing procurement organizations. Also, companies with top-performing procurement organizations reported profit margins 15 percent higher than the average company; and 22 percent higher than companies with low-performing procurement teams.

“Procurement goes straight to the bottom line,” said Terrence Curley, Director of Product Management in the IBM Software Group and B2B Commerce at the conference, which drew 3,000 attendees. “That’s a lever. You overpay and it’s an instant connection to the bottom line. You make the correct decision and you have a direct advantage. It’s a complex issue. There isn’t a procurement application out there like ERP is for manufacturing.”

The study surveyed 1,128 procurement executives at companies with revenues of $1 billion or more in 22 countries across North America, Europe and Asia. And 15 percent were found to be top performers defined by their ability to exert influence and drive innovation across their companies while also excelling at procurement fundamentals.

As companies realign their organizations to take a more customer-centric approach, the role of procurement professionals is changing from a traditional back-office, transaction-oriented role to one with more visibility and influence among C-suite executives, who are keen to manage risk that can undermine profitability. CPOs are positioned to help identify and mitigate supply-related vulnerabilities because they serve as the bridge between suppliers and internal consumers. Similarly, procurement teams can use data analytics to help improve demand forecasts and identify additional savings opportunities within spend categories.

There is a strong correlation between being a top-performing procurement organization and effectively using procurement technologies. For example, in regards to Supplier Relationship Management (SRM), the study found that 94 percent of top-performing companies are highly effective in their use of procurement technologies, compared to 44 percent of all surveyed companies that are average or below average in their technology effectiveness. The study also found that CPOs think that supplier intelligence solutions, including 360-degree global view of supplier relationships and procurement performance dashboards, will be the most important area of investment over the next three years.

Top performing organizations also are turning to social business for innovative ways to manage their global teams and collaborate with their suppliers. The study found that high performers are more likely to use social tactics such as crowd sourcing (81 percent) and collaborating on product development with suppliers (88 percent), versus their low-performing counterparts (38 and 47 percent respectively).

The study identified several common actions that enable top performing procurement organizations to achieve such impressive results. They include:

Gain insight through Big Data analytics—By using analytics to tackle Big Data challenges, CPOs can gain new insights into internal business operations and their supplier networks to identify vulnerabilities. 83 percent of high performing CPOs excel at leveraging analytics compared to just 63 percent of the low performers.

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