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Procurement Lessons Learned from the Economic Downturn

by Suzanne Miglucci and Rebecca Hughes | SAPinsider

July 1, 2011

For procurement departments, where budgets can be constrained even when the economy is not in turmoil, lessons learned from those companies that survived the recalcitrant economy are invaluable. Uncover the top four tactics that best-in-class performers employ to elevate procurement proficiencies, along with the metrics they use to measure their success.
 

There are few positives to an economic recession. But one silver lining lies in the lessons learned from those companies that survive despite such challenging business conditions. These lessons are especially helpful to procurement departments, whose budgets are often constrained even when the economy is not in turmoil.

So, how have the survivors of the recalcitrant economy pulled through? How have best-in-class companies found new and strategic ways to elevate their procurement proficiencies? To find out, SAP spoke with seasoned procurement executives from companies of various sizes and across several vertical markets. Here we’ll share the top four tactics employed by best-in-class performers, along with the metrics they use to measure their success.

Tactic #1: Prioritize the Spend Categories You Want to Manage

Most companies find that opportunities for cost savings exist across the entire organization. However, some opportunities present a greater possibility for savings than others. Start with categories that are simple to standardize and will deliver a high return. The indirect goods category is a prime target because these commodities provide the perfect opportunity to leverage catalog content management tools, punch-out catalog sites with preferred suppliers, and common data interchange formats. Next, prioritize a second tier of categories by carefully analyzing the total spend by category, the percentage of off-contract spending, the complexity of each category, and the potential impact that cost savings in that category could bring to the business.

Metric: Spend Under Management

According to Aberdeen Group, best-in-class procurement organizations bring as much as 80% of their spend under management — a full 58% more than their laggard peers (see Figure 1).1 By increasing the amount of spend under management (the percentage of non-payroll spending that the procurement organization manages), companies can increase their on-contract spending (the percentage of purchases made with preferred and contracted suppliers), while driving down the overall cost of goods. Industry averages show that every dollar of spend under management represents 5% to 20% in savings.2 Companies should prioritize spend categories that will yield the highest rate of spend under management savings.

Figure 1 Comparing best-in-class companies to their peers

Tactic #2: Create a Compelling End-User Purchasing Experience

Companies need to look at their procurement processes from their end users’ perspective. Employees are web-savvy; they shop online, navigate purchasing sites, and use tools that allow them to slice-and-dice their options. Then they come to work and have to fill out a glorified spreadsheet to order goods and services. Instead, today’s procurement environments should provide a “shopping” experience for employees to increase on-contract spend. You can do this by building an environment that looks familiar to users and provides visibility into their purchasing choices. Fronting contracts with catalog interfaces and incorporating supplier catalogs that allow users to compare goods increase procurement contract compliance.

Metric: On-Contract Spending

Best-in-class organizations ensure that nearly 80% of their spending is on-contract, contributing significantly to the bottom line (see Figure 1)3. Increasing on-contract spending boosts contract compliance. Giving buyers catalogs and purchasing options with preferred suppliers increases on-contract spending and drives funds toward existing contracts and the discounts negotiated by your category managers.

Tactic #3: Achieve a “Zero-Touch” Procurement Process

An often-overlooked opportunity to improve procure-to-pay is the automation of procurement workflow and approvals, which creates a “zero-touch” process. Many companies’ comfort with antiquated processes leaves significant savings on the table. It’s time to step back and evaluate the order-to-invoice process. How many human touch points are required before a purchase order is approved? How long does that process take? What are the required steps to place an order with suppliers and to receive their invoice for approval? Best-in-class organizations use procurement solutions to do the heavy lifting on approvals, order delivery, and invoice management, saving time during the purchasing process while reducing the amount of manual tasks. Companies should establish a documented value threshold under which approval is automatic; designate low-value, low-risk categories for simplified approval; and leverage system workflows to automatically send orders to the supplier, without human intervention.

Metrics: Requisition-to-Order Costs and Cycle Time

According to Aberdeen Group, organizations that implement e-procurement solutions and services stand to cut requisition-to-order costs in half and reduce order cycle times by as much as 60%4. By reducing the manual work in this zero-touch process, companies also give their employees greater bandwidth to work on more strategic activities, such as sourcing and contract management.

Tactic #4: Develop a Supplier Connectivity Strategy

A significant portion of procurement workflow relies on interactions with the supplier community — a largely untapped source of additional cost savings. We recommend integrating suppliers at key points in the procurement process. Companies that do this see shortened requisition-to-invoice cycle times and additional savings in total cost per order. Key suppliers also welcome a tighter relationship as they too benefit from reduced overhead and better insight into your needs.

Metric: Percentage of Suppliers Enabled

According to Aberdeen Group, best-in-class procurement organizations enable five times more suppliers than their laggard peers do (see Figure 1)5. With collaborative strategies and by developing key integrations, such as electronic purchase orders and e-invoices, procurement teams can dramatically increase their total spend under management and shorten procure-to-pay cycle times.

Achieve Your Procure-to-Pay Excellence Goals with SAP Solutions

SAP procurement solutions cover the spectrum of procurement processes. These solutions enable organizations to reduce process costs and purchase prices for goods and services, accelerate and automate procurement compliance; maximize contract savings realization; enrich supplier relationships; and unify disparate systems and data sources with a flexible platform and shared services. For more information, visit http://fm.sap.com/proc-amer.

Suzanne Miglucci (suzanne.miglucci@sap.com) is Senior Director of Procurement Solutions Marketing at SAP. In this role, Suzanne contributes to the direction and market awareness of procurement portfolio solutions to ensure customer value and business growth.

Rebecca Hughes (rebecca.hughes@sap.com) is a Solution Manager and member of the Solution Marketing team for Procurement at SAP. In this role, Rebecca helps integrate customer needs and market trends into SAP’s procurement portfolio.

 1 Aberdeen Group, “The State of Strategic Sourcing” (March 2011). [back]

2 See footnote 1. [back]

3 See footnote 1. [back]

4 Aberdeen Group, “E-Procurement: Trials and Triumphs” (October 2007). [back]

5 Aberdeen Group, “Supplier Enablement Report” (May 2007). [back]

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