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Written by Marijn Overvest | Reviewed by Sjoed Goedhart | Fact Checked by Ruud Emonds | Our editorial policy

 Procurement Benchmarking – The Ultimate Guide

Key take-aways

  • Procurement benchmarking is a data-driven method to show how procurement adds value and aligns with industry standards.
  • It highlights performance gaps, identifies value opportunities, updates practices, encourages innovation, and maintains competitiveness.
  • It relies on precise data, may struggle with finding similar organizations for comparison, can hinder innovation, requires resources, may prioritize quick fixes over long-term goals, and faces resistance from employees.

Get ready to unlock the secret recipe for procurement success! In this article on procurement benchmarking, you’ll learn about how top-performing companies stand out. We’ll sprinkle in some tips to spice up your procurement strategy too!

What is Procurement Benchmarking?

Benchmarking in procurement serves as a data-driven method to demonstrate how procurement adds value to the company. It ensures that practices align with industry standards. 

Moreover, it focuses on identifying top-performing organizations that excel in various aspects of business, such as capabilities, processes, and performance, offering opportunities to learn from their successes, set improvement targets, and avoid potential pitfalls. These sound benchmarking practices ultimately contribute to enhancing the organization’s value.

Importance of Benchmarking

Procurement benchmarking offers organizations a clear and objective perspective on their 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.

Types of Procurement Benchmarking

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

1. Internal benchmarking

Internal benchmarking involves comparing the performance of one part of your organization against other internal units or subsidiaries. For instance, if you have 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.

2. Competitive benchmarking

Competitive benchmarking involves comparing your organization’s procurement processes with those of industry leaders and competitors in the same market. By doing so, you can ensure that your organization remains competitive 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.

3. Functional benchmarking

Functional benchmarking entails comparing specific functions or departments within your 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.

4. 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 particularly useful when you want to optimize specific processes within your organization.

5. Customer benchmarking

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

It helps ensure that your services, including procurement, align with what your 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.

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

How to Benchmark

Here’s a step-by-step guide to help you benchmark your procurement effectively:

1. Define Key Performance Indicators (KPIs)

Start by identifying the most relevant and impactful metrics for your procurement operations. Consider what aspects of procurement are critical for your business. This could include KPIs related to cost savings, effective spend management, on-time delivery, product quality, or any other metrics aligned with your competitive strategy.

Ensure that your chosen KPIs are measurable, specific, and directly tied to your procurement objectives.

2. Identify Benchmarking Partners

Identify organizations within your industry or sector that have similar size, complexity, and procurement practices. These organizations will serve as your benchmarking partners.

Evaluate the procurement metrics and performance of these partners to gain insights into how they are achieving success in areas that are important to your organization.

3. Gather and Analyze Data

Collect data related to the selected KPIs and procurement processes. Data sources can include internal records, industry reports, surveys, and, if possible, data from your benchmarking partners.

Utilize analytical tools or software to process and analyze the collected data. This analysis should reveal areas where your procurement performance falls short of your expectations or industry standards.

4. Optimize Processes

Use the insights gained from your data analysis to create an improvement plan for your procurement processes. Identify areas that need attention and consider how changes can be made to enhance performance.

Develop a strategy for addressing shortcomings and fine-tuning your procurement processes. This might involve changes to workflows, supplier relationships, technology adoption, or other aspects of the procurement process.

Collaboration with internal and external stakeholders, such as your procurement team, suppliers, and customers, is crucial in shaping and implementing the improvement plan. Their insights and feedback can be invaluable.

5. Monitor Progress

Continuously track and monitor your procurement performance over time. Regularly assess the impact of the changes and improvements you’ve implemented.

Be prepared to adjust your plan if significant improvements are not observed. Continuous improvement is an iterative process, and modifications to your strategy may be necessary to achieve desired results.

Advantages and Disadvantages of Procurement Benchmarking

It's important to understand that benchmarking is a valuable tool for organizations looking to enhance their procurement processes. In the following table, we'll explore the key benefits and potential drawbacks of benchmarking in procurement, helping you make informed decisions about how to leverage this practice for your organization's benefit.

Advantages
Highlights performance gaps, allowing you to focus on improvement areas
Identifies opportunities to generate more value
Keeps you updated on modern procurement and supply management practices for continuous improvement and challenging the status quo
Encourages innovative thinking and challenges conventional practices
Validates your current strategies
Maintains or enhances your competitive advantage
Disadvantages
Relies on precise data; inaccurate or outdated data can lead to poor decisions
Locating similar organizations for comparison is challenging due to industry and size differences
Focusing on rivals can hinder innovation within your organization
Requires significant time, money, and personnel, which smaller companies may struggle with
Often prioritizes quick fixes over long-term strategic goals
Employees may resist implementing benchmark-driven changes

Best Practices in Procurement Benchmarking

It wouldn’t be honest to say that one-size-fits-all when it comes to sourcing and procurement benchmarks. However, following best practices can help any organization figure out its unique needs and create a benchmarking process to meet them.

Here’s what you can do:

1. Start with a plan

To make the most of your procurement benchmarks, you need a plan to:

  • Identify the benchmarks that matter most for your procurement performance, efficiency, and competitiveness.
  • Set up these benchmarks and create a plan to track them effectively.
  • Get the digital tools needed to analyze performance, spending, and compliance data for actionable insights.

Your procurement team can craft this plan by answering these basic questions:

  • Which benchmarks related to your current workflows are most important?
  • Should you create new benchmarks to measure the impact of new processes?
  • What benchmarks are most valuable for your stakeholders, and should they be customized?
  • How many benchmarks should you have – not too few, not too many?
  • How specific should each benchmark be to provide useful insights?
  • What data sources and tools will you use for analysis?
  • How will you integrate benchmarking into your overall business processes?
  • What methods will you use to evaluate the effectiveness of best practices?
  • How can you keep the costs of benchmarking low?
  • What processes need updating to apply insights from benchmarking for improvement?

2. Align your benchmarking to your business goals

Procurement benchmarking is more than just about making procurement better; it’s part of a larger effort to boost overall business performance and profits. How do you incorporate your goals within your benchmarking?

  • Work with your finance team to ensure your benchmarks fit with your financial goals, such as Return on Investment Capital (ROIC) or Economic Value Added (EVA).
  • Take advantage of existing benchmarks in your industry. Organizations like the American Productivity & Quality Center (APQC) offer benchmarks for various sectors.
  • Calculate the overall efficiency of your procurement by considering cost savings and financial benefits compared to the annual procurement cost.
  • Link your benchmarks to your enterprise’s value creation by tracking spending, supply chain performance, and data efficiency. This helps in understanding how procurement affects cash flow and profit.
  • Assess efficiency in processes and how well stakeholder needs are met using benchmarks like approval time and error rates.

3. Invest in procurement technology

Having a plan and knowing what to measure is just the start. To get the most value from your procurement benchmarks, you need the right digital tools. Manual processes won’t cut it in today’s data-rich procurement landscape.

How can businesses benefit from procurement technology?

  • All your data, from spending to trends, is stored in one user-friendly, cloud-based platform. This brings transparency, accuracy, and real-time access for monitoring KPIs and spotting opportunities or issues.
  • Ditching paper processes saves money and resources. It ensures that all spending data is collected electronically for analysis.
  • Robots handle repetitive tasks quickly and with high accuracy, reducing errors and delays. This, combined with data management, provides clean data for better analysis and insights.
  • Data is at the heart of process management. It makes it easier to set, monitor, and adjust benchmarks, leading to more savings and less waste.
  • Easily expand benchmarks across your organization, including new projects and departments, while keeping all your data integrated.
  • Connect diverse data sources, both internal and external, to highlight where you’re creating value and areas where you can improve efficiency and reduce risks.

Conclusion

Making smart business decisions, strategic sourcing, and driving growth and innovation all start with using business intelligence effectively. Don’t hesitate to harness the valuable insights that come from setting up and tracking the sourcing and procurement benchmarks that are most relevant to your company’s growth, performance, and financial success.

Frequentlyasked questions

What are the types of benchmarking in procurement?

There are five primary types of benchmarking in procurement. Internal benchmarking involves comparing one part of an organization with others within the same organization. Competitive benchmarking looks at industry leaders operating in the same market. Functional benchmarking focuses on achieving excellence in specific areas, while generic process benchmarking evaluates individual processes for improvement. Customer benchmarking assesses an organization’s performance against customer expectations.

What is benchmarking in procurement and supply chain management?

Benchmarking in procurement and supply chain management is the process of comparing an organization’s practices and performance with those of industry peers or best-in-class companies to identify areas for improvement and enhance efficiency, cost-effectiveness, and overall effectiveness in procurement and supply chain operations.

How is benchmarking used to measure purchasing performance?

Benchmarking measures purchasing performance by comparing an organization’s procurement practices, costs, and efficiency with those of top-performing competitors or industry leaders to identify areas for improvement and best practices to adopt.

About the author

My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.

Marijn Overvest Procurement Tactics

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