Organisations that measure procurement’s financial contribution to the company generate twice the average measurable cost reduction as other companies, a study has found.
Procurement Powered Business Performance: Assessment of Excellence in Procurement (AEP) Study 2014, found leading purchasing functions deliver benefits to the company at a rate 10 times greater than the cost of the team, technology and external support, and have reduced costs by twice as much as typical companies.
AT Kearney’s research of procurement functions in 185 companies around the world evaluates procurement’s contributions to businesses over the last two years.
It found the top procurement organisations integrate more closely with business units and regions, which has increased their relevance, influence and impact on the organisation, the report found. Supplier-driven innovation and risk management also boost the function’s performance.
By building and investing in high-performance procurement teams, focusing on improving category management and enhancing suppliers’ capability, the leading procurement organisations have also continued to boost their performance since the previous study in 2011.
However, most other companies only sustained the gains they made between in the three years to 2011. “We were surprised that after the gains made between 2008 and 2011, many companies only sustained their improvements over the last three years,” said John Blascovich, AT Kearney partner and the report’s co-author. “The typical company may be ‘wasting a crisis’ by not continuing to enhance one of the most powerful levers to improve profitability and competitive advantage.”
Many companies have not improved their procurement performance because the function is not given responsibility to take the lead for major spend categories nor consider broader opportunities to create value, the study concluded. Weak strategic and organisational links to the rest of the business and difficulty communicating the function’s return on investment also affect the function’s success.
Stephen Easton, AT Kearney partner and the report’s co-author, added: “Leading procurement organisations communicate what the function delivers to the company in the terms that the business can understand, typically by using finance organisation language to measure and share performance data.”