Top procurement teams deliver seven-and-a-half times the cost of investment

7 December 2015

Top performing purchasing departments are delivering financial benefits more than 7.5 times the cost of investment in procurement, according to research.

The 2015 Return on Supply Management Assets (ROSMA) performance check study surveyed 226 senior financial executives from Australia, France, Germany, the UK and the US, to assess the financial performance of procurement.

The study, entitled Building a Bolder Legacy: The Procurement Mission is Under Way, found the top quartile performers had improved slightly on 2014. It said more than 25 per cent of the benefits mostly came from applying advanced methods to unlock value including through asset productivity gains, complexity reduction, and "clean sheet redesign". These leaders generate around $1.25 million in financial benefits per procurement professional each year.

Most middle-tier performers generated value of three to five times the investment and costs of their supply management assets, though this has not improved since tracking began in 2011, the study found.

The research, a collaboration between CIPS, A.T. Kearney, and the Institute for Supply Management, also found among CFOs and the finance community, 50 per cent believed that bottom-quartile procurement teams returned less than 1.5 times their cost in value.

CPOs from this quartile reported financial benefits were insufficient to cover their activities, the study said. It concluded these companies would require radical transformation to close the cost-efficiency gap.

Performance varied widely across all of procurement’s key value drivers, including spend coverage, sourcing programmes, sourcing project yields and outcomes, compliance rates, and operating costs, according to the study.

It concluded: “Procurement remains a function plagued with inconsistent performance in delivering strategic activities.”

Some 71 per cent of finance respondents reported procurement lagged behind in rigour and depth of performance tracking, with only 20 per cent reporting their procurement departments had clearly defined, understood and respected performance metrics.

Joe Raudabaugh, AT Kearney partner, said procurement faced a transformational period, similar to what other sectors had experienced over the past 30 years.

“Beginning with manufacturing in the 1980s, and moving on to supply chains, research, engineering, and more recently sales and marketing, the mission for procurement organisations is underway – whether procurement is ready or not,” he said.

The report also noted making changes in tracking performance and accountability would make procurement organisations more attractive to millennials, who valued transparency and recognition of their achievements.

David Noble, group CEO, CIPS, said: “We can strengthen the position of procurement as a critical source of strategic enterprise value, establish the CPO as a core executive team member integral to the leadership narrative, and position procurement as a preferred career platform for tomorrow’s best talent.”

The study also said many companies were beginning to embrace zero-based budgeting, where all business stakeholders must justify resources and spending every year. It said these companies showed “game-changing improvements in shareholder value performance by forcing rigorous alignment of resources and expenses”.

Thomas Derry, chief executive of the ISM, said: “The growing interest and popularity of the value-from-procurement topic continues to shape the conversations and forums serving the profession. This is not a disruptive force, but a welcomed constructive change agent that challenges us all to raise our game, both in terms of productivity and overall results.”

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