Procurement Benchmarking: How To Use Procurement Intelligence Data To Improve Your Business Spend

Procurement Benchmarking: Best Practices

It would be more than a little disingenuous to claim any particular set of sourcing and procurement benchmarks is universal in utility and value.

However, following best practices can help nearly every organization identify its unique business needs and develop a benchmarking process to meet them.

• Start with a Plan in Mind

  To put your procurement benchmarks to their best possible use, you need a plan for:

  

  • Identifying the benchmarks with the biggest impact on your procurement performance, operational effectiveness, and competitive strength.
  • Formalizing those benchmarks and developing an implementation plan for tracking them effectively.
  • Obtaining the digital tools necessary to analyze performance, spend, and compliance data for actionable insights.

  Your procurement team can craft a plan more easily by answering a few basic questions about your business needs, goals, and priorities.

  1. Which procurement benchmarks related to today’s workflows are most important?
  2. Are there other benchmarks we should establish to measure the potential impact of new processes?
  3. What benchmarks have the greatest value for our internal and external stakeholders? To what degree, if at all, should these benchmarks be customized for each stakeholder?
  4. What scope should we establish for our benchmarks? Too few will provide insufficient business intelligence; too many will bog down the system with more measuring than actionable improvements.
  5. How specific should each benchmark be to provide the broadest possible utility while preserving contextual value?
  6. What data sources should be used? What eSourcing and eProcurement tools are available to provide broad and granular analysis of benchmark data from our selected sources?
  7. What processes will be used to organize and execute procurement benchmarking? Will these processes be a distinct system, or integrated into our overall business process management approach?
  8. What methodologies will be used to measure the effectiveness of best practices? Which benchmarks must be established in order to evaluate the evaluation process itself for maximum return on investment?
  9. How can we minimize the expense of procurement benchmarking?
  10. What processes must we update or develop in order to apply the insights collected from procurement benchmarking to continuous improvement, organizational and operational optimization, and our business process management paradigm?

  By answering these questions, you’ll have a much firmer grasp on what you want to measure, how you want to measure results, and the approach you want to use in effectively managing both process optimization and the evaluation process itself.

• Tie Benchmarking to Your Desired Business Outcomes

  While its immediate purpose is to support procurement transformation through optimization, procurement benchmarking is part of a larger set of processes designed to improve value to drive better competitive performance and profitability at the enterprise level.

  In simpler terms, procurement benchmarks should provide useful business intelligence on potential organization-wide improvements and the workflows and metrics to which they are directly connected.

  Ensure your benchmarks make the cut by:

  

  • Collaborating directly with your finance team to ensure your procurement benchmarks align with internal accounting frameworks (e.g., Return on Investment Capital (ROIC), Economic Value Added (EVA), Return on Assets (ROA), etc.).
  • Taking advantage of existing sourcing and procurement benchmarks within your industry. For example, the American Productivity & Quality Center (APQC) provides key procurement benchmarks for many industries, including the petroleum and chemical industries, the automotive industry, and more.
  • Establishing and tracking a general “total procurement ROI.” This metric provides a useful enterprise-level overview of procurement efficiency and effectiveness. It’s calculated using a simple formula:
    (Total annual cost savings generated by procurement + Any additional concrete financial benefits) / Annual cost of the procurement function

  A faster, “rule of thumb” version of this metric is also sometimes calculated as X dollars spent for every $1,000 of earned revenue, with a 10 to 1 return on procurement investment as the most common benchmark.

  Connecting your procurement benchmarks to enterprise benefits and value creation via:

  • Spending flows, used to link spend data to revenue generated, resources consumed, etc. while also providing a reliable method for showing how spend impacts cash flow and profit/loss in your financial records through the use of spend analysis.

    Benchmarks used in these flow may include:

    • Spend under management
    • Cost reduction (“hard” savings focused on lowering total cost of ownership, or TCO through cost comparisons over time)
    • Cost avoidance (“soft” savings captured through proactive maintenance, process improvement, etc.)

  • Supply chain flows, used by many companies to monitor supplier performance and compliance.

    Benchmarks built into these flows are used to build a strategic, agile, and resilient supply chain while also providing useful insights for establishing and strengthening supplier relationships.

    Often, organizations have a specific and discrete set of supply chain management KPIs they use in tandem with procurement benchmarks, including:

    • Number of vendors
    • Supplier compliance rates
    • Supply chain cycle time
    • Inventory turnover rates

  • Data flows, where benchmarks like average approval time, error rates, etc. are used to evaluate process efficiency (including the efficiency of the benchmarking process) and the effectiveness with which stakeholder needs are met.

    Benchmarks connected to this datastream include:

    • Average cost of processing a purchase order
    • Number of purchase orders processed electronically
    • Average purchase order processing time

• Invest in Procurement Technology

  Having a plan and knowing what you want to measure for optimal performance is just the beginning.

  To really extract complete value from your sourcing and procurement benchmarks, you need the digital tools necessary to spin the straw of big data into the sparkling gold of optimized processes, maximum ROI, and invaluable actionable insights.

  There’s simply too much data being generated in contemporary procurement to maintain a competitive posture if you’re using manual, paper-based processes.

  By implementing a procurement solution such as Planergy, your procurement organization gains access to advanced data analytics, robotic process automation (RBA) and artificial intelligence, leaving outdated paradigms behind.

  A comprehensive procurement solution simplifies procurement performance management and, by extension, organizational performance optimization, in several key ways:

  

  • Centralized data management collects all your data in a single, cloud-based, mobile-friendly location.

    Both direct and indirect spend data is captured and seamlessly integrated.

    Transparency, accuracy, and completeness are greatly improved; real-time access and user-friendly analytics make it easy to monitor KPIs, identify trends, and spot potential problems and opportunities quickly.

  • Eliminating paper-based processes provides immediate cost savings by eliminating paper materials, storage, and organization costs.

    It also reduces the need for on-premises hardware, software, and IT support. It also allows all spend data to be captured electronically, and automatically, for analysis.

  • Process automation eliminates human error and costly delays. Software robots can perform high-volume, time-consuming and tedious tasks at speeds far beyond human capabilities, with commensurate improvements to accuracy.

    Integration with data management and analytics mean you’re getting clean, complete data for the best possible analysis and insights.

  • Data-driven process management makes continuous improvement an integral part of all workflows.

    Not only is it easier to set, monitor, and adjust benchmarks, but the benchmarking process itself can be more effectively monitored and refined to maximize savings and minimize waste and inefficiency.

  • Scalability of data management, process automation and optimization, and data analytics makes it much simpler to deploy and monitor benchmarks across your organization, incorporating new projects, departments, and business units as required while preserving a cohesive datasphere.

  • Centering procurement as a value leader through the ability to develop and monitor a broad range of complex and sophisticated metrics.

  By connecting diverse data sources (both internal and external), procurement professionals can contextualize spend data to highlight strong sources of value (both hard and soft) while also revealing areas of potential risk, suboptimal efficiency, etc.

  Vast amounts of data are no longer overwhelming, but rather a rich source of insights that grows only richer over time.