March 17, 2023 | Procurement Strategy
There is little doubt that procurement has evolved into a strategic business function that can help identify savings opportunities, make informed decisions and mitigate risks.
In fact, many businesses believe their success in the quickly evolving new normal depends on how well their procurement function performs.
The question now is: How can a business determine if their procurement team is performing up to the desired standards? Is it meeting its key performance indicators (KPIs) and delivering on its promises?
This is where procurement benchmarking comes into play. Benchmarking can determine procurement’s performance vis-à-vis industry standards.
It can draw a comparison between how procurement is currently performing and what it needs to achieve over time. In this process, it can identify gaps that must be filled to reach the desired level of performance.
Data is fundamental to benchmarking. The key challenge for procurement is to identify the ‘right’ data for benchmarking. Businesses operating in the same industry may have different priorities and capabilities. Their procurement strategies, scope and objectives may therefore differ. Accessing comparable data for benchmarking thus becomes a challenge.
No less important than data is determining what metric is to be measured. Like objectives, procurement metrics and KPIs may also vary across businesses and industries. A business may be solely focused on cost savings while its peers may be looking to develop multiple capabilities.
In fact, procurement’s performance in many organizations is now evaluated based on the overall value it brings to the business. Metrics can include multiple factors such as lead times for raw materials, average cost of processing a purchase order, percentage of suppliers delivering on time and supplier compliance rates to name a few.
Finally, how to use the insights generated from benchmarking also poses a challenge. The benchmarking exercise may provide valuable insights. However, the exercise may prove futile if there isn’t a system to leverage these findings and improve processes.
While the key objective of benchmarking is to support procurement transformation, it can also be used to drive improvements at the enterprise level. Thus, organizations can align benchmarking with larger business goals by linking procurement metrics with those of other functions.
For example, procurement metrics can be aligned with finance to determine the return on investment capital. Likewise, businesses can align procurement with sustainability and supplier diversity goals.
Additionally, procurement benchmarking should not be a one-time exercise, especially amid growing uncertainty in the business environment. Instead, businesses should engage in benchmarking on an ongoing basis.
Done regularly, benchmarking can add value by enabling a business to use the findings to improve procurement as well as larger business processes.