Procurement a High Priority for Most Companies, Yet Many Fail to Implement Improvements

New York — September 24, 2008 — Almost three-quarters (74 percent) of executives believe procurement issues are a high priority at their companies, yet about half (49 percent) say that the procurement function in their companies focuses too much on cost reduction instead of value creation, according to a survey of almost 600 global procurement and C-level executives by KPMG LLP, the audit, tax and advisory firm.

According to the KPMG survey findings, companies are missing business improvement opportunities by ignoring key procurement issues, especially in the areas of tax and technology.

More than half (55 percent) of the respondents said that they consider direct and indirect taxes in their procurement operations, but slightly less than a third (32 percent) have actually successfully reduced their tax burden by structuring international procurement operations in a tax efficient manner.

Similarly, many companies report using IT tools such as "spend analysis" (53 percent) and "e-procurement" (50 percent), but nearly three-fourths (72 percent) of the respondents have less than 10 percent of their spend channeled through e-procurement and e-sourcing applications. Furthermore, only 21 percent believe outsourcing has improved the performance of their procurement function.

"Today's procurement function must contend with complex issues, such as tightening economic conditions, demand for cost reduction, fluctuating and rising commodity prices, supply market risks, increased globalization and business sustainability, but few departments have the appropriate resources to properly manage them," said Samir Khushalani, principal in KPMG LLP's Advisory Services. "In tight economic times, companies that take a strategic and integrated approach to procurement can not only reduce costs, but can also realize value and efficiencies throughout the organization."

Since the survey revealed that procurement function reports almost evenly into operations (42 percent) and finance (38 percent), this frequently requires companies making deep structural changes to the supply chain. "Bridging the gap between operations and finance is key to realizing long-term business effectiveness, so its position at the crossroads makes procurement an attractive place to begin when looking to improve performance," noted Khushalani.

Environmental, CSR Issues on Organizations' Radar

The KPMG survey also found that environmental and human rights issues are increasingly on organizations' radar, but at this point those issues are near the bottom of their selection criteria when choosing a supplier.

One-third (33 percent) of respondents have begun or are starting the process to reduce the environmental impact of products they are producing, and almost another third (31 percent) are considering doing so. Similarly, 43 percent of companies surveyed have begun using or are starting to consider human rights issues in procurement decisions, with another 28 percent considering doing so.

Yet only 30 percent of those surveyed said the supplier's environmental record was very important or important when selecting a supplier, and 32 percent said a supplier's reputation for corporate social responsibility (CSR)/human rights is very important or important. In contrast, the two most important criteria for selecting suppliers were quality and price, among 93 percent and 88 percent, respectively, of respondents.

"We see the move towards sustainability varying greatly by industry, with some of the large retailers taking a lead in this area, while other industries are more focused on their bottom lines," said Khushalani. "However, it's clear that many organizations are closely following these issues, and over the long-term we expect more companies to make sustainability a priority, especially as they determine how being socially-conscious can dovetail with business effectiveness, which it certainly can."

The KPMG "Beyond Purchasing" survey, conducted by the Economist Intelligence Unit, was based on surveys of 599 global senior executives, including more than half who were procurement decision-makers and more than a quarter who were C-level executives. Fifty-eight percent of survey respondents were from organizations with more than $1 billion in annual revenue, from a cross-section of industries.

The complete "Beyond Purchasing" report is available at www.kpmg.com/Global/IssuesAndInsights/ArticlesAndPublications/Pages/Beyondpurchasing.aspx.

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