The Cost of Running a Procurement Team

In the past decade, I have been seeing various procurement structures with inconstant number of team during my career. It makes me think what the cost is running a procurement. With some great articles, it helps me understand the working capital planning in the procurement team. The world-class procurement organizations are able to deliver greater value to the business, such as cost savings, while simultaneously operating at lower cost. The successful procurement organization uses lower cost on processing transactional cost. On the other hand, the organization invested in people with focus on strategic procurement activities which drives the high valuable results.

How to measure procurement cost?

The method of measuring the procurement is based on procurement cost as percentage of the managed spend. Based on the benchmark study, the world-class is ~ 0.59% with the peer is ~ 0.75%. The result is another way around between the world-class and the peers. The result of world class on saving is 5.6% (cost saving as a percentage of spend). The peer’s saving is ~3.3% of the spend.

What makes up procurement cost?

There are 4 categories for the procurement cost

· Process cost

Labor: Procurement employees, contractors and indirect supports

Outsourcing: Cost for 3rd party services

· Technology

It includes hardware, software, voice and data expenses. The average is 50% of the employees’ salary annually

· Others

Facilities and overhead, travel expense, training and supplies

What is in common and what needs to be done?

I have seen the procurement organization spends more on the tactical tasks such as processing with the majority working capital. The most of resources hired are doing transactional tasks instead of focusing on the strategic work.

Doing things right

· Staff size, such as headcount.

· Invest in people and talents

· Technology utilization. Utilize the tool to the 100% potential

· Focus on the basic before you work on dream projects

· Productivity and digitalization

· Clear on the target and be realistic

· Leverage the technology such as RPA, automation and AI

Doing the right thing

· Quality of the work to reduce the error

· Process optimization

· Clean data and data driven decision

· Strategic alignment with business

· Self-served service model for low risk (guided buying)

In the end, you should put the businessman’s hat on even you are the head of procurement organization. Stop thinking about the cost savings and start thinking values and ROI as a businessman. Further, the goal should be move away from a labor intense transaction-based orientation to a profit-oriented service function that helps budget owners get more value from the suppliers for every dollar spend.