To measure procurement performance, it is essential to benchmark the procurement function.
Doing this will not only improve the overall spend but will also ensure that you get value for the spend and enhance procurement function.
While benchmarking your procurement function, you should focus not only on external benchmarks but also internal ones so that you know where you are lacking and take the right corrective measures to boost procurement processes and provide enterprise value.
Here are some of the reference points that you can use while benchmarking the procurement function in your organisation.
Operating expenses of procurement
The operating expense that procurement incurs should be less than 1% of the company’s total expense.
In case this expense is higher, analyse the procurement spend in total and individually to ascertain where you are spending more than is necessary.
After pinpointing the areas where you are spending too much, look for ways to reduce this so that you can drive down procurement operational expense to under 1% of your organisation’s total expense.
Look at cost reduction to maximise savings
Generally, the procurement of goods and services is repetitive as your organisation will need the same things over and over again.
To ensure cost reduction in these repetitive purchases without compromising on quality, procurement should look to buy these goods and services for a lower price than what they paid earlier.
The reduction should be about 2% to help procurement transform into a profit-making centre.
Cost of processing orders
Procurement also incurs a cost for processing and issuing purchase orders.
Remember, this cost should always be less than the cost of the items, goods or services you are buying.
If it is higher, your organisation is losing money and you should look for ways to reduce it.
These are some of the reference points that you can begin with before you switch to using the industry standards.