Time is money in procurement.

• Author: Hackett, Greg
• Position: Benchmarking one's procurement organization

To improve procurement, your firm will have to streamline lower value-added activities, leverage information and coordinate resources.

While procurement may be small in terms of staff, few other functions in the corporation control so much, or hold such promise for improving the bottom line. Smart companies recognize this tremendous potential.

Unlike the finance function, overall cost reduction isn't the immediate answer for unearthing greater value in procurement. The average billion-dollar goods producer spends only 1 percent of purchased costs to manage its 157-person procurement function; for service companies, 1.6 percent is average.

The impact is far greater when you bypass the cost issue and go straight to improving organizational effectiveness: Finding ways to boost procurement's spending efficiency just 2 percent could mean an increase of $100 million in shareholder value for a billion-dollar company. And in procurement, when effectiveness is attacked, addressing excess costs is concomitant.

Two challenges are keeping true procurement improvements beyond the reach of many companies. One is finding the time. Procurement spends the bulk of its effort on operational support activities, such as requisition and purchase order processing, supplier selection and material receipts processing.

With 76 percent of procurement's overall time focused on lower value-added activities, an appreciable number of managers and professionals engage in routine, day-to-day control and risk-management activities, rather than higher value-added decision sup port. In fact, the typical manager spends less than 2 percent of the time on effectiveness-boosting activities such as developing strategic alliances. While they believe they are as productive as possible, too often managers are drawn into solving operational support problems that eat away at the time they need to build strong procurement relationships and plan for the future.

The second challenge is leveraging information and coordinating resources. Approximately 56 percent of a corporation's purchases are not coordinated among all divisions and units. Rather, they're done on a decentralized basis, and information that can help optimize price and service isn't shared among business units.

Leading-edge companies are breaking free of traditional practices, transforming their processes in fundamentally different ways to overcome such challenges and realize the full potential of procurement.

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