If you are seeking to measure procurement performance, do not hesitate to benchmark your procurement function. It will help improve spend value and also ensure optimal procurement function. You should not only look for external benchmarks to link with purchasing metrics, but also use these to discover where to focus so that you ensure enterprise value and improve procurement processes.
Here are some procurement benchmarks that you can begin with, before introducing other industry standards:
Operating expense of procurement function
Look at the procurement operating expense and ensure that it is less than 1% of the organisation’s total expenses. If it is higher, you should analyse the spend to see where you are going wrong, and then look for ways to drive the spend to below 1% of total expenses.
Ensuring savings through cost reduction
Most organisations purchase the same items, goods and/or services. To ensure cost reduction savings, it is essential that procurement buys the same things at a lower price than before. Procurement then becomes a profit-making centre, as the savings automatically boost the bottom line of the company. Companies should aim for 2% cost reduction savings on the total spend.
Cost of processing purchase orders
Procurement must consider the cost of processing and issuing purchase orders. This should be less than the cost of the item(s). If the cost of processing purchase orders to vendors or suppliers is higher than the cost of the items, it will result in a loss for the organisation and waste essential resources.
Number of active suppliers
While procurement must have a database of suppliers, check the percentage of active vendors and suppliers. Most CPOs use 80% of procurement spend on 6% of suppliers. So, when procurement analyses active suppliers, it is better placed to allocate resources to manage and nurture them, ensuring a better Return on Investment (ROI).
These are some of the references for benchmarking your procurement function. There are more, but you can start with these and keep adding to make the procurement function more organised and profitable. Or you could look to use a benchmarking system such as this – Click here