5 Ways World-Class Procurement Organizations Get Quick Results
Leading companies have realized that the procurement function directly affects their bottom line. Hence, world-class organizations follow some procurement best practices in order to achieve better performance.
In this article, let us find out what leading procurement teams do differently in areas like working capital, spending visibility, supplier management, and analytics.
5 best procurement practices used by World Class organizations:
1. Apply Best Practices knowledge
World-class procurement departments have already moved from being a tactical purchasing function.
Hence, they apply best practices to the purchasing cycle’s various activities and use analytics and strategy to align the procurement function with the business goals.
2. Greater spend visibility
In its Realizing the Power of Procurement Reports, A. T. Kearney finds that leaders have visibility into 80 % of their direct and indirect spending compared to 50 % of non-leaders.
The report also states the importance of advanced analytics tools to understand the various cost drivers. Furthermore, analytics should be applied not just to spend management but also other areas like forecasting risks for measuring supplier performance.
3. Looking for value
Supplier management is an ignored but high potential area for cost savings and risk management. Therefore, procurement departments need to unlock this value using strategic long term initiatives that focus on building the supplier relationship and building more resilient supply chains.
4. Select the right KPIs
Please note that KPIs must not be used in isolation, but they should be used as benchmarks against industry performance. Therefore, the suggested KPIs include:
- Purchase Order Cycle Time: The time it takes your team to issue, review, approve, process and pay purchase orders
- Average Purchase Order Processing Cost: The time required to process a purchase order, staff hours required at each stage, expenses like special supplier fees and exception costs.
- Invoice Processing Time: This helps prevent missed discounts, late fees, and damaged supplier relationships. Zycus has a history of helping clients achieve their business goals. Read more about how Zycus helped a leading North American health insurer achieve 98 % accuracy with it’s AI-powered extraction of invoice level data.
- Average Invoice Processing Cost: This includes indirect expenses, late fees and labor costs related to data entry, exceptions and corrections
- Invoice Exception Rate: Includes invoices lacking crucial information or having wrong information
- First Time Match Rate: This KPI tracks the accuracy and completeness of documents such as purchase orders, receiving paperwork, and invoices and the success in matching them on the first try
- Days Paid Outstanding (DPO): The average number of days it takes to pay outstanding accounts payable
- Spend Under Management (SUM): The percentage of procurement spend controlled by management
- Productivity per FTE: It allows a company to quantify larger processes based on the total number of FTEs required to complete a specific task
- Compliance Rate: Contractual and policy compliance ensure legal security. Metrics to note are the ratio of disputed invoices to total invoices and total difference between the price paid and price quoted
- Supplier Defect Rate: Breaking it down based on the defect type will offer insights about supplier performance. It is usually measured in defects per million
5. Avoid common mistakes
Cost savings, quality, and delivery work in unison. Therefore, avoid situations where an excessive focus on cost savings results in procuring cheap goods and services. Hence, if you notice a pattern of reporting high on not meeting KPIs, it is indicative of the KPIs not choosing well.
The A.T. Kearney report highlights that Procurement leaders follow a three-part success formula: team excellence, category excellence, and supplier excellence. For team excellence, Procurement teams maintain strong collaboration and visibility with the CFO.
Category excellence requires a balanced scorecard creation with critical metrics aligned to the broader business goals. Also, Supplier excellence presents the most significant opportunity for procurement. Hence, by following these best procurement practices, organizations can drive goals like innovation and risk management.
However, organizations have realized now that the benefits of state-of-the-art procurement go beyond costs. In addition, procurement is a business partner that supports the organization in meeting its larger enterprise-level goals. Therefore, read our latest article on 5 Ways World-Class Procurement Organizations Stand Apart to apply them to your own business.
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