Best Practices Boost Savings

Two-thirds of firms struggling with e-procurement basics, study finds

Atlanta  March 19, 2002  Two-thirds of companies are struggling to establish efficient collaboration and integration with suppliers, and these companies are spending 63 percent more on procurement transaction processing than those firms that disseminate more than 60 percent of their purchase orders electronically, according to newly released findings of an ongoing study of best practices in procurement.

The study, by benchmarking firm Hackett Best Practices, a division of consulting firm Answerthink, also confirmed that as the number of suppliers per billion in spend decreases, so does total procurement cost as a percent of spend. Consequently, despite global access to suppliers via the Internet, over the past four years the average company has actually reduced its supplier base by 23 percent.

For the ongoing study, Hackett Best Practices has tracked the performance of about 2,000 global organizations and identified key differentiators between world-class and average companies across a diverse set of industries.

In compiling its 2002 best practices trend data, Hackett evaluated the effectiveness (quality and value) and efficiency (cost and productivity) of the procurement function across five performance dimensions: strategic alignment with the business; ability to partner with internal and external customers; use of technology; organization; and processes.

Among other findings, Hackett found that while most companies have seen the number of purchase orders generated increase since 1998, top-performing companies have substituted blanket purchase orders for these time-consuming transactions. In the process, they have reduced their total purchase orders by 78 percent compared to average (18,053 annually per billion dollars of spend compared with the average of 83,025).

"Procurement executives at world-class companies use best practices to streamline outdated processes and maximize their use of technology, allowing them to push past inefficiencies that have traditionally dogged their organization," said Richard Roth, managing director at Hackett.

Roth said that to respond effectively to the demands of today's business environment, companies need to take advantage of any means to interact and execute with outside providers more effectively and keep costs in check. "This can encompass something as basic as cross-functional purchasing teams or as advanced as optimizing their Web architecture to enable company-wide e-procurement via a single interface," Roth concluded.

Hackett also found that the best companies have elevated supplier-base management to an art form. Along with a 77 percent reduction in the number of suppliers they use, they contract with 97 percent fewer suppliers for items that constitute 80 percent of their total spend, thus leveraging the cost and effort associated with common purchases across the organization.

In addition, the best procurement organizations employ more professionals with analytical skills, utilize cross-functional teams more extensively and provide a greater amount of training, according to Hackett. None of these techniques is traditionally associated with efficiency, yet these companies manage to operate their procurement organizations with 69 percent lower costs while delivering more value, the study found.

Finally, Hackett concluded that even average-sized companies can save $4.5 million per billion dollars of spend if they routinely negotiate 80 percent or more of their contracts on a corporate-wide basis. This does not take into account additional savings that are generated from a better-leveraged spend.

Participants in Hackett's studies comprise 80 percent of the Dow Jones Industrials, two-thirds of the Fortune 100 and 60 percent of the Dow Jones Global Titans Index. Global study participants include AT&T, Citigroup, Dell USA, Delta Airlines, Dow Corning, EDS, Hewlett-Packard, ExxonMobil, General Electric, Northrop Grumman, Philip Morris USA and Lockheed Martin.