With the recent focus on cost reduction, many organizations are devoting more time to identifying opportunities for long-term savings. One way to cut costs is by decreasing the cycle times associated with procuring materials and services.The cycle times for these activities provide critical information on an organization’s procurement efficiency. Factors that can shorten procurement cycle time can range from the efficiency of the organization’s procurement operations to how quickly suppliers deliver ordered materials. American Productivity & Quality Center’s (APQC’s) research indicates that top-performing procurement organizations achieve shorter cycle times by improving efficiency both within their procurement functions and from their suppliers.
Using data from APQC’s Open Standards Benchmarking in procurement, APQC identified a group of top-performing organizations that had high performance on five key performance indicators (KPIs) representing the areas of cost effectiveness, process efficiency, cycle time and staff productivity. APQC created a top-performer scale by taking the sum of the performance on the five KPIs for each of the 514 eligible organizations in its data set. APQC then pulled the top 10 percent of the performance values and classified the associated organizations as top performers. This created a set of 51 top performers for procurement and a comparison group of the remaining 463 organizations.
APQC looked at how top performers performed against the other organizations in its data set on the following cycle time measures:
- Cycle time in hours to place a purchase order.
- Average supplier lead time on purchased materials.
- Procure-to-pay cycle time in days.
Placing Orders and Receiving Materials
Top performers in procurement take fewer hours to place a purchase order and wait fewer days to receive materials from suppliers. The cycle time in hours to place a purchase order for these organizations is 8.0 at the median, compared to 11.0 for other organizations. APQC defines the cycle time needed to place a purchase order as the time from when the procurement function receives a requisition line item to the time it submits the purchase order to the supplier.
Top-performing organizations may achieve this shorter cycle time because they focus on improving their procurement processes and eliminating activities that can add unnecessary time when completing tasks. These organizations may also implement technology solutions such as e-procurement systems that reduce cycle time by automating much of the process.
Top performers also see shorter cycle times from their suppliers. With a median supplier lead time of six days, these organizations receive deliveries from suppliers two days sooner than the other organizations in APQC’s data set. Supplier lead time can vary for individual organizations based on factors such as the type of material being purchased and shipping distance. However, regardless of these factors, longer lead times can force organizations to carry higher levels of inventory and increase inventory carrying cost.
Multiple factors may play a role in the shorter supplier lead times obtained by top performers. These organizations may extend their efforts to achieve efficiency to suppliers and other external partners. They may also more closely monitor and evaluate suppliers, which can allow them to weed out underperforming suppliers and receive the best service for their procurement dollars.
Payment Efficiency
APQC’s data also indicate that top performers in procurement have shorter procure-to-pay cycle times. APQC defines this cycle time as the number of days from when an organization issues a purchase order until payment is made to the supplier. At the median, top performers take 10 days to pay their suppliers. The other organizations in APQC’s data set, however, take a median of two weeks to pay their suppliers or four days longer than top performers.
The shorter time needed for top performers to pay their suppliers may be a result of improved processes implemented throughout the procurement function. However, these organizations may also realize the importance of collaboration between the procurement and payables functions. This can include the integration of processes between the two groups to enable seamless handoff. It may also extend to the development of mutual goals and measures to ensure that suppliers can be paid as quickly as possible.
Top performers in procurement take less time to issue purchase orders to suppliers, need less time to receive deliveries and take less time to issue payment for materials received. The exceptional performance these organizations achieve indicates that they may adopt process improvement efforts throughout their procurement functions. However, these efforts may also extend to suppliers to enable the faster delivery of goods.
An organization looking to improve its cycle times should consider adopting several efforts within the procurement function. The first should focus on improving internal procurement processes. Once this is successful, the organization can expand its efforts to include a more thorough evaluation of supplier performance and even collaboration with suppliers to implement improvement plans. The organization can also encourage collaboration between the procurement and payables functions to enable work handoffs to occur without unnecessary delays. By reducing the time needed for procurement processes, the organization can realize benefits that can extend to the bottom line.
