Calculate the benefits of transparency in purchasing in 6 steps
Big procurement successes are the payoff for arduous preparatory work. With internationally operating corporations, in particular, the first step is the recognition of the bundling potential across the group. This is only possible if the ‘same’ goods and services, as well as the shared suppliers, can be identified across all divisions, business branches and companies. This can only be achieved if the material (groups), suppliers and prices for the goods and services were extracted, merged and harmonized from the various information systems.
An effort that pays off
By cleaning up, condensing and making the information comparable, you will be able to present it in a ‘uniform language’ and a transparent manner at the corporate level.
Attention: The complexity of a project like this should not be underestimated – the source data comes from the most diverse source systems, in a multitude of languages, classification schemes, taxonomies and quality standards.
Many companies underestimate the significance of purchasing data transparency in particular. This is due to the fact that the monetary benefit of the data quality is very difficult to place. Especially in times when corporations are under pressure for results, investments in information technology in general and in data quality in particular are subject to critical scrutinies. The following paragraph shows that the economic impacts on data quality and the consequent transparency regarding purchasing volume are substantial.
Advantages of transparency in purchasing
The starting point for observing the economic advantages of purchasing data transparency is the entire external procurement volume of a group of companies (see image below).
A particularly large advantage, however, is in indirect purchasing as the Maverick Buying Quota tends to be higher there on the one hand. On the other hand, the data situation is poorer, since the need for repetitions based on material and material groups is rare. The challenge for procurement data transparency is thereby much greater in indirect purchasing than it is in direct purchasing.In this part of the expenditures, only such purchases placed with suppliers that are not part of the company are considered. Internal suppliers, for example GmbHs (limited companies) offering IT or facility management services, are not considered in such analyses as a rule.
60% of the external Spend can be bundled
We assume that approx. 60% of the external procurement volume can, in turn, be bundled. This means that this part of a merger, which consists of the fragmented needs of the different corporate units, is accessible. We also assume that internal teams, or so-called procurement groups or lead buyers, deal with approx. 50% of the most important needs that can be bundled. Procurement groups are made up of buyers from different corporate units (or alternatively, the purchasing organization is already organized according to product groups and their lead buyers). It is their responsibility to negotiate the group-wide framework agreements concerning the most important materials and services that can be bundled, for example for:
- Fleet management,
- IT hardware and software,
- Office furnishings, etc.
In our experience, it is possible to sign a framework agreement with 80% of such procurement groups (according to this, the KPI for “framework agreement quota” amounts to 80%). A normal figure for percental cost savings that come about in doing so is approx. 12.5%. If you were to disperse the depicted fragments gradually onto the external procurement volume, as is shown in the image, it becomes evident that 3% can be saved annually through strategic purchasing initiatives. This also corresponds to rule of thumb that strategic buyers and specialized business consultants have, according to which about 2-5% of cost savings with reference to the external procurement volume are reachable through this kind of investment in transparency.
According to the author’s experience from a number of projects, over half of the potentials shown can only be realized if transparency concerning procurement volumes is guaranteed. If the depiction of the fragments in the image were to be updated, it becomes clear that the economic benefits of the data quality are at approx. 3% of the external procurement volume. The percentage may seem low at the first glance, however if one were to look at a typical corporation with approx. 1 billion Euro external procurement volume per annum, the potential lies at around 30 million Euro per annum.
We offer you a holistic solution for increased transparency, potential analyses and measuring your procurement success regarding indirect purchasing with our DataCategorizer, SpendControl and InitiativeTracker modules.
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In this blog you will find expert knowledge about initiative management and project management in strategic procurement. InitiativeTracker is a software for planning and monitoring your sourcing initiatives, controlling your procurement organization and measuring your procurement performance.
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