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Corporate Procurement

Firms Losing Average of 14 Million Dollars in Annual Savings

The typical sourcing process used by procurement teams is leaving a lot of money behind, but the solution is not what most of them think

The main job of a procurement team at any firm is to ensure their colleagues get as much value as possible for what they buy from suppliers. One way procurement teams try to do this is to get involved as early as possible in the buying process.

Procurement professionals have used the standard seven-step sourcing process (see chart 1) to improve their approach to buying for more than 20 years, and it’s generated billions in savings for companies both large and small.

But it’s not perfect. Only 51% of corporate spending that’s managed by Procurement is managed with the level of “discipline” the function wants and this results in $14 million in missed annual savings for the average-sized large firm, according to CEB data.

Poor discipline might come from suppliers not properly understanding the business problem they’ve been bought into solve, a contract that allows suppliers to charge for extra services providing insufficient benefit, or not vetting a wide enough field of suppliers before settling on one. And, on top of that, 77% of procurement professionals report that value is lost during a typical corporate purchase at their firm.

The standard seven-step sourcing model

Chart 1: The “standard” seven-step sourcing process

The Undisciplined Middle

Most of this type of under-disciplined spend lies between two segments of what Procurement controls. At one end of the spectrum sits the low value spending – such as on office supplies – where software can be used to find the lowest prices and manage contracts, and where anyone in a company and at a supplier is happy to let Procurement take the lead.

At the other end is strategic high-dollar spend: huge purchases managed through a stage-gated process with a lot of scrutiny from senior managers and where all involved on the buying side want Procurement to play a role. This would be for things like a multi-million (or billion) upgrade to the company’s enterprise resource planning software.

The problem lies with those purchases in between: medium to large spend deals in areas of the business where Procurement’s level of involvement is inconsistent and dependent on the discretion of business partners. This might include ad-hoc consulting services, advice from outside legal counsel, or project-based temporary labor. A lack of discipline here leads to the company missing out on significant savings, or being able to get more for their money.

To solve this problem, procurement teams typically try to get involved earlier in the sourcing process, but recent research shows that this isn’t the ideal answer. In fact, according to CEB analysis, the point at which business partners contact Procurement for help with making a purchase has no impact on the overall sourcing discipline involved in the purchase.

This probably comes from a combination of better-than-expected buying behaviors from those business partners and because procurement teams maybe aren’t as good imposing sourcing discipline as they might think. Future posts will look at this in more detail.

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