Benchmarking in Procurement: Improving Performance Metrics

Procurement processes are crucial for an organization’s growth and profitability. By comparing their performance with industry best practices, procurement managers can identify savings and improvement areas. Indirect procurement benchmarking helps organizations measure their purchasing performance and compliance, providing data to inform decision-making and strategize procurement efforts.

Procurement health shows a strong correlation to corporate performance.

Achieving the performance and cross-functional integration required for procurement excellence has been challenging. And the prominent trends that are reshaping so many aspects of modern business are only adding to the complexity of the challenge. Today’s procurement function must navigate new markets and new sources of supply. It must balance the benefits of global sourcing and standardization against the risks associated with complex logistics and the need to tailor products and supply chains to suit the requirements of local markets. It must develop the agility to manage price volatility, shortages, and supply interruptions. Increasingly, it must cope with political uncertainty and global trade tensions.

To maintain this delicate balance reliably and consistently, organizations must view procurement as an area to be optimized. Enter procurement benchmarking.

Procurement benchmarking

Procurement benchmarking involves analyzing an organization’s procurement processes by comparing them with industry best practices. Key performance indicators include cost efficiency, procurement cycle speed, supplier quality, and adherence to procurement policies. The aim is to identify weaknesses and opportunities to refine procurement activities, improving overall business performance.

The chief procurement officer is vital in guiding the procurement function towards strategic sourcing and leveraging procurement technology. Adopting insights from procurement benchmarking can enhance process efficiency, leading to cost savings and improving the procurement cost structure’s effectiveness.

Gap analysis in procurement benchmarking helps identify discrepancies between current processes and the industry’s best practices, offering a roadmap for enhancing procurement performance. It’s not just about comparing expenses but evaluating the impact of procurement technology on the procurement function and the strategic use of procurement cards.

Importance of benchmarking

Benchmarking offers organizations a clear and objective perspective on procurement performance by comparing it to peers or competitors. This external view provides invaluable insights into areas where improvements can be made, whether it’s enhancing cost efficiency, supplier relationships, or streamlining processes.

Through comparisons, companies can also stay at the forefront of industry standards and trends. It encourages a proactive approach to change, ultimately driving excellence and competitiveness in procurement practices.

Moreover, it helps organizations optimize spending by identifying cost-saving opportunities and negotiating better deals with suppliers. This directly impacts the bottom line, improving profitability and ensuring a healthy financial outlook.

Lastly, benchmarking provides a means for organizations to align their procurement strategies with broader business objectives. By evaluating their performance against the best in the industry, companies can make informed decisions about supplier selection, sustainability initiatives, and risk mitigation strategies, ensuring that procurement becomes a strategic driver of overall success.

Benchmarking in procurement has the following advantages:

• Identifies gaps in performance to focus efforts on areas for improvement
• Identifies opportunities for creating more value
• Ensures that you’re kept up to date with modern procurement and supply management practices to develop new approaches or challenge accepted wisdom and current practice
• Inspires you to develop new approaches to challenge (i.e., accepted wisdom and current practice)
• Validation of an existing strategy
• Helps to ensure the organization gains or maintains a competitive edge

Types of Procurement Benchmarking

The different types of benchmarking that support improvement and add value to any organization include:

• Internal benchmarking

Internal benchmarking involves comparing the performance of one part of the organization against other internal units or subsidiaries. For instance, if there are multiple companies within a corporate group, one subsidiary can evaluate its performance in procurement against another subsidiary within the same group.

It can also promote healthy competition within the organization, leading to the sharing of best practices and lessons learned. It can also help identify areas of improvement and streamline processes.

The only limitation is that the best practices may exist outside the organization, and internal benchmarking may not capture external industry standards or innovations.

• Competitive benchmarking

Competitive benchmarking involves comparing the organizational procurement processes with those of industry leaders and competitors in the same market. By doing so, the competitiveness of the organization can be ensured and aligned with the current market standards.

This type of benchmarking helps organizations understand where they stand in relation to industry peers and identify areas where they need to catch up or outperform competitors.

The primary focus here is on staying competitive and taking cues from the best in the industry.

• Functional benchmarking

Functional benchmarking entails comparing specific functions or departments within the organization, such as procurement or operations management, with world-class leaders in those same functions, even if they are not direct competitors.

This approach allows organizations to focus on achieving excellence in specific areas, regardless of the industry. It’s beneficial for improving internal processes and achieving operational excellence.

With this type of benchmarking, the scope is narrower, concentrating on specific functions or departments.

• Generic process benchmarking

Generic process benchmarking is similar to functional benchmarking but goes one step further by evaluating specific processes rather than entire functions. It allows for a more detailed examination of individual processes and their efficiency. It focuses on individual processes within functions.

This type of benchmarking provides a granular view of processes and helps identify areas for improvement. It’s beneficial when you want to optimize specific processes within the organization.

• Customer benchmarking

Customer benchmarking assesses an organization’s performance against customer expectations and demands. The primary focus is on aligning services and processes with customer needs.

It helps ensure that all services, including procurement, align with what customers need and expect. By understanding and meeting customer expectations, organizations can enhance customer satisfaction and loyalty. This type of benchmarking is particularly relevant in industries with a strong customer focus.

Most importantly, organizations can apply multiple benchmarking approaches simultaneously to achieve the best results.

Best Practices for Procurement Benchmarking

• Set clear goals and review them regularly

Start by setting clear, measurable goals to check how well procurement is doing. Figure out what needs to get better, like cutting costs, improving supplier quality, or making processes more efficient. Keep checking and updating these goals to stay current and make changes based on new data or market shifts.

• Pick the right KPIs

Choose Key Performance Indicators (KPIs) that match your business goals and give you a clear picture of how procurement is doing. Focus on things like saving money, how long things take, the quality of suppliers, following rules, and order accuracy.

• Use tech-enabled tools

Use technology like business intelligence and data analytics to make sense of your data. These tools help you see patterns, trends, and where you can get better.

• Continuous improvement

Benchmarking is an ongoing effort, not a one-time thing. Keep evaluating your procurement against your benchmarks, find where you need to catch up and make changes to do better. Be ready to adjust your approach as new information comes in, the market changes or your organization evolves. This keeps your procurement processes sharp and competitive.

• Teamwork

Benchmarking works best when you involve people from different parts of your organization, like finance, operations, and supply chain. This ensures that your benchmarks make sense for the whole business and helps get everyone on board. Working together gives a fuller picture of procurement’s role and makes sure improvements are broad and in line with overall business goals.

• Compare with the best across industries.

Look outside your organization and compare your procurement with the best in the industry and what your competitors are doing. This shows where you can get better and helps you set higher goals. Stay up to date on industry trends and new technologies that could affect your procurement strategies and performance.

Critical purchasing KPIs for efficient procurement

• Number of suppliers

Track the number of suppliers your business deals with against the industry’s best practices. Your procurement team could have a single or multiple suppliers for a single item. To reduce dependency on a single supplier, consider having a few vendor options for business essential items. Doing this can also reduce risk and increase efficiency during times of limited supply.

However, purchasing from too many uncontracted suppliers reduces discounts and limits savings opportunities, which ultimately impacts your bottom line.

• Percentage of spend under management

Spend under management refers to the percentage of total spend that is strategically managed by procurement. Monitor the percentage of spend under management no matter how small or large your organization is, or how many users interact with your procurement system.

By configuring policies within your organization’s procurement software, you can gain more spending under management and eliminate wasteful spending trends.

• Cost savings

As you get more spending under management and reduce wasteful spending, the next logical metric to track is cost savings.

You can monitor cost savings so that you can fine-tune your digital procurement strategy. By practicing cost avoidance, collaboration, and relying on features such as RFQ (request for quotation), you can ensure that your team purchases goods and services at the best price. Always remember to strategically consolidate suppliers and purchase orders to save costs (like shipping costs) and get the best deals and volume discounts.

• Analyze contribution to total spend.

To better understand where your organization’s money is being spent and drive more cost savings, monitor KPIs related to spending contribution. Gain insights into indirect spending behavior, use your procurement solution to analyze spend by:

• Departments or cost centers
• Employees
• Suppliers
• Budgets
• Projects
• Transactions

• Cycle times

Benchmark your organization’s productivity by calculating procurement and accounting cycle times and costs against industry standards.

For instance, the purchase order cycle calculation includes all associated activities like:

• Requisition approval
• Purchase order creation
• Budget review
• Supplier review
• PO submission
• Receiving
• PO Matching and closure

• Procurement ROI

Lastly, determine the ROI your organization’s procurement operations generate. You can calculate procurement ROI by subtracting your department’s costs from the total savings it generates, both financially and operationally, for the entire organization.

Not only does doing this give you a strong indication of your department’s performance, but it also demonstrates your department’s value.

Challenges in benchmarking

• Data collection and management

Data is fundamental to benchmarking. The critical 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.

• Establishing Relevant Benchmarks

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, the average cost of processing a purchase order, percentage of suppliers delivering on time and supplier compliance rates to name a few.

• Ensuring Stakeholder Alignment

To succeed in benchmarking, it’s essential to gain agreement among all stakeholders on its objectives and methods. This requires involving individuals from different departments and levels for a unified understanding of the initiative’s goals. Such alignment ensures focused efforts and actionable, organization-wide supported results.

• Adapting to Industry Changes and Global Disruptions

The ability to remain agile and modify benchmarking practices in response to industry shifts and global disruptions is a significant challenge. Organizations must stay informed about global trends, technological advancements, regulatory changes, and economic shifts that could impact their industry. This agility allows them to adjust their benchmarking practices accordingly, ensuring that their benchmarks remain relevant and that the organization can maintain or improve its competitive positioning in a rapidly changing environment.

• Appropriate use of insights generated

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.

Conclusion

While the critical 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.

About Zetwerk

Zetwerk works with original equipment manufacturers in North America and worldwide, fulfilling their manufacturing requirements for customized components and assemblies. We act as a second brain to the OEMs. Our team of experts not just executes the customer’s manufacturing strategy, but adds tangible value at every step of the process, right from vetting designs to finding and managing the suppliers to quality control and logistics. Our customers regard us highly for our transparent and hands-on approach to manufacturing.

Zetwerk executes these projects through its network of partner suppliers spread across USA, India, China, Vietnam, and Mexico. These world-class facilities provide practically unlimited production processes, capacities, materials, part sizes, and weights as well as secondary operations, surface finishing, assembly, and related services. Importantly, we have our teams established in all these countries with a huge presence in the US.

Zetwerk recently acquired Unimacts, a US-based manufacturing services company, providing further impetus to our commitment to serve North America as a primary market. We have more than 2,000 customers across North America, Asia-Pacific and the Middle East, and a network of more than 10,000 manufacturing partners worldwide. Founded in 2018, we are backed by some of the world’s leading venture capital firms including Sequoia, Kae Capital, Accel Partners, Lightspeed, and GreenOaks. As of 2023, Zetwerk was valued at US$ 2.8 Bn.

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