Measuring Procurement's Impact


From DCAT Value Chain Insights (VCI)

By Patricia Van Arnum posted 12-16-2015 07:18

  

As 2015 comes to a close, a crucial question for procurement organizations is how they performed in 2015 in delivering value and cost benefits to their organization. A recent study offers perspective?

A recent analysis by A.T. Kearney evaluated what it termed "the brand of procurement" and the role of procurement in value-creation activities and in fostering improved relationships between chief procurement officers and chief financial officers. So what did the study find? DCAT Value Chain Insights (VCI) takes an inside look.

Taking an Inside Look 
The 2015 Return on Supply Management Assets (ROSMA) Performance Check Study, “Building a Bolder Legacy: The Procurement Mission is Under Way,” is a collaboration between A.T. Kearney, the Institute for Supply Management (ISM), and the Charted Institute of Procurement & Supply (CIPS). The joint initiative’s objective is to build the brand of procurement and encourage the profession to embrace advanced value-management practices and stronger chief procurement officer (CPO) and chief financial officer (CFO) partnerships. The study found that top performing procurement organizations improved their performance versus the 2014 report results with most delivering 10 to 15 times returns. Top performers were also found to deliver 7.5 times the costs and investment base in procurement. These leaders generated about $1.25 million in financial benefits per procurement employee per year. More than 25% of their benefits come largely from applying advanced methods to unlock value beyond unit cost reductions, such as through asset productivity gains, complexity reduction, and clean-sheet redesign. The top performers deliver the best performance across all procurement value drivers, with some of the most efficient operators that have driven their cost-to-serve to below under 50 basis points as a percent of spend.

The study showed that middle-tier performers generated three to five times the investments and costs of their supply management assets, including people and technology. The middle-tier performers, however, did not materially improve their productivity since tracking began in 2011, and while their performance dropped slightly this reporting year, it remained consistent with historical norms. The study noted that this group had some visible success with advanced methods, but lags leaders across all drivers and most notably on velocity, yield, and cost and overall efficiency.

Although top-performing procurement organizations are already delivering substantial financial benefits to their companies, the second part of this ROSMA research, which surveyed 226 senior financial executives from Australia, France, Germany, the UK and the United States, found that 50% of financial executives believe that bottom-quartile procurement organizations return less than 1.5 times their cost in value. CPOs from these bottom-quartile teams validated this perspective, reporting dilutive performance results with financial benefits insufficient to cover their activities. The bottom-quartile performers lag middle-tier performers on yield, compliance, and cost. These companies also did not report any material results from advanced methods and would require significant transformation to close the cost-efficiency gap with middle and top performers.

The study found that performance varies widely across all of procurement’s key value drivers, including spend coverage, sourcing program velocity, sourcing project yields and outcomes, compliance rates, and operating costs. Procurement remains a function with inconsistent performance in delivering strategic activities, according to the study. “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,” said David Noble, CEO of the Chartered Institute of Procurement & Supply, in commenting on the study's findings.

The study found that performance varies widely across of procurement's key value drivers: spend coverage, sourcing program velocity, sourcing project yields and outcomes, compliance rates, and operating costs, regardless of company size, industry, or spend mix. Also, within the CFO and finance community,, 71% report that procurement lags most or all other functions in terms of the rigor and depth of performance tracking. Only 205 report that their procurement organization have very clearly well-defined, well understood, and widely respected performance metrics, according to the study. The study found that 31% of CFOs and finance leaders said that procurement results are widely accepted, but 69% report that their results are challenged either sometimes, frequently, or always. Only 16% of CFOs and finance leaders say that they see at least 70% of the contracted savings reported in their financial results, and more than 57% indicate that they see less than 50% of the benefits or have no idea what is realized.

The study also found that many companies are beginning to embrace zero-based budgeting (ZBB). Companies employing ZBB demonstrate improvements in shareholder value performance by forcing rigorous alignment of resources and expenses, according to the analysis. The transparency of ZBB provides top procurement organizations with the opportunity to bring significant value to financial decisions through knowledge of details, behaviors, and costs. ZBB strengthens procurement performance by forcing three-way alignment. Line-item spend management is integral to the process with visibility, variance reporting, and correction planning as primary features, according to the study. 

The study authors also note that procurement organizations have the opportunity to attract millennials if the profession is willing to make changes regarding performance tracking and accountability. The study points out that millennials are a generation that prefers to join organizations with value-management practices, specifically where there is transparency, accountability, and recognition of their achievements. Procurement offers millennials the opportunity to learn the business from end-to-end, secure executive access and exposure, and have a significant impact on business performance, concluded the study.

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