e-Procurement Becoming a Best Practice

Top purchasing organizations applying technologies to reduce procurement administration costs

Chapel Hill, NC  August 14, 2002  Leading procurement organizations are adopting new technologies to reduce the cost of procurement administration and streamline their companies' total spend, according to a new benchmarking study from consultancy Best Practices.

"Leading companies decrease processing costs and increase procurement efficiency with self-serve procurement marketplaces, reverse auctions, procurement marketplaces and online catalogs linked to a procurement application," the consultancy reported in the study, "Optimizing Procurement Management: Structuring for Growth."

"The technologies also allow procurement organizations to monitor procurement more closely and to focus on strategic plans," Best Practices added.

The consultancy emphasized that leading corporate procurement organizations are decreasing spending, renegotiating with suppliers and leveraging new e-procurement solutions by parceling various activities, roles and responsibilities between corporate overseers and decentralized executors.

The consultancy classifies the trend toward giving buyers more control over the total supplier relationship as a best practices for purchasing organizations. "When centralized buyers act as portfolio managers, [companies in the study] report reduced maverick spending and lower costs for approval processes for purchase orders," the consultancy wrote. "Buyers manage the entire buying experience through self-service procurement programs and purchasing cards," which can help companies reduce overall spending, Best Practices concluded.

At the same time, leading companies are centralizing procurement strategies and activities in order to gain better control over their total spend and take advantage of economies of scale. Centralized procurement organizations are retaining control of such activities as policymaking, strategic sourcing and e-procurement, the consultancy wrote, while responsibility for other activities are shared with business units but overseen centrally.

This centralized control over purchasing strategy is viewed as critical. "Top companies establish procurement strategies, standards and regulations centrally to maintain companywide procurement consistency," Best Practices stated. "Even decentralized organizations create leadership teams of business unit heads and global councils to establish common standards and perform general procurement oversight."

"Companies that do not coordinate procurement activities often waste money on redundant costs and pour resources into procedures that are not aligned with corporate goals," said Kristen Smithwick, a project manager at Best Practices.

As an example of the impact that centralization can have on the bottom line, the consultancy reported one company completely centralized its procurement functions and saw $1 billion in first-year savings alone.

Also in the report, Best Practices recommended setting specific goals for buyers to drive quantifiable cost savings and developing a three-year plan for the future to set targets and forecast the purchasing function's growth needs.

In the report, Best Practices featured practices from such companies as IBM, John Deere, Halliburton and Midway Airlines.