Where to Start with Procurement Benchmarking?

Whilst researching for a project earlier in 2011/12, I was amazed to discover some 3 million sites referencing procurement Benchmarking  Undertaking even a cursory examination of the content of some of the more prominent sites and you conclude that the procurement function has got plenty to chose from, some of the approaches having more merit than others.
The original term ‘benchmark’ is derived from the chiseled horizontal marks that surveyors used for holding a piece of angle-iron which acted as a bracket, referred as ‘the bench’, for a leveling rod. This ensured that the leveling rod could be re-positioned in exactly the same place in the future. Only one benchmark was typically required as a reference point. Unlike surveying, the application of Benchmarking to commercial activities usually requires multiple reference points, which then need to be compared to a defined group of indicators. The danger with Benchmarking in the commercial domain is to focus on too narrow a group of reference points. This can and does inevitably lead to a misleading view of the world around you.
With so much to chose from, and a striking lack of consistency across the numerous approaches that are on offer, it is probably worthwhile presenting some points to bear in mind when you are considering Benchmarking your procurement function.
Firstly, when selecting your Benchmarking protocol, it is important to choose an approach that covers a broad range of different indicators to include at a bare minimum metrics from the three following groups:
1. Organizational Metrics
Organizational metrics are the data that describe how the procurement activities within the organization are performed e.g.
 The number of full time employees per 1bn spend (whatever currency you work in)
 The purchased spend as a percentage of operating costs
 The fully loaded cost per procurement employee
 The purchased spend per purchasing employee
 The total number of suppliers, by category and legal entity
 The number of suppliers per MR1bn spend
 The number of training hours per FTE, by discipline and level
 The headcount supporting Sourcing and Order Processing
 The number of non-procurement staff involved in Procurement
 The ratio of managers to staff
2. Purchasing Process Metrics
Process metrics are the data that relate to the process of purchase order capture through to payment e.g.
 Average cost to process purchase order through to delivery and payment
 3rd party spend per order
 Average cost to process invoices
 Volume of ‘straight through orders’ (i.e. no human intervention required)
 Level of compliant spend by Category, Supplier and Order Channel
 Average time to process an order
 Average time to pay a supplier
On this, there are only a few examples of surveys that provide any kind of serious insight around the processing of purchase orders. Purchase order processing and trade settlement in securities processing involve exactly the same activities; investment banks drove out significant levels of efficiency and improved levels of control by developing a set of simple and well understood metrics that helped them manage the process. There is no reason why the purchasing function cannot do the same.
3. Category Specific Metrics
Category specific metrics are the data that relate to the specifics of the contracts that have been established with suppliers e.g.
 Price per hour/unit/licence etc. for goods or services delivered by the supplier as compared to sector average, competitor price point etc.
 Payment terms
 Order query response times
 Service levels
 Penalty charges for late delivery
 Guarantee periods
 Late payment charges
It is important that the three areas outlined above are covered in depth because when combined they will give you the most balanced view of overall procurement effectiveness. Knowing that your procurement function is world class in terms of functional capability is of little value unless you know that the contracts that you have in place with your suppliers are actually saving your organization money. Knowing that you have superior price points within your contracts is valueless, unless you know that people are using them. Effective benchmarking is about bringing together multiple sets of data, taken over different points in time, using different methodologies from a mixture of providers and interpreting this data in a balanced way and presenting a clear set of next steps. There is no ‘silver-bullet’ solution and it is the ‘next steps’ that are important.
All of the three areas outlined above can be rolled up into a ‘practices’ benchmarking study which looks at the way the various activities within the procurement function operate, such as Strategic Sourcing or Procurement. These studies capture selected metrics from the different areas and reference them back to world class standards. They also assess subjectively via interviews the activities within the procurement function to validate findings, and develop next steps. These studies are an excellent way to understand ‘what should be done’ as opposed to ‘what we are currently doing’.
Other valuable guidelines to bear in mind when considering benchmarking also include:
 understanding the definitions and constraints used for the applicable benchmarks

  • ensuring that the population of reference data is relevant to your sector, large enough to be of value and covers a time period that is germane to the operational period in question
  • deploying a study protocol that combines both objective and subjective data, ideally in such a way that they reinforce each other
  • being clear about caveats that need to be attached to the metrics; price paid only tells one part of the story – is it the average price paid over time, or does it include the impact of supplier rebates?
  • the inclusion of a broad range of reference points – internal, competitor, non-competitor, regional, best in class and world class
  • make sure that you are comparing apples to apples – it is highly unlikely that your own data will match that of your study; understand the limitations, and the resulting implications.

Remember that Benchmarking is not an exact science; in capturing data, approximations need to be made which may not necessarily work for your organization. Engaging multiple providers and who employ different methodologies will allow a more balanced picture to emerge.

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