Operations Management Viewpoint

Worldclass Purchasing
Central results from the “Purchasing Value Excellence” (PVE) study

The global financial and economic crisis appears to have pulled out of its low point. Now is when the decision is made as to
who will capitalize on the opportunities of the recovery phase and who can lay the foundation for the years of future success.
This can only happen with a methodical, optimally structured and staffed purchasing department functioning as the backbone ofa successful company. By lowering costs, the purchasing department significantly contributes to increased value. However, thisis not the case for all companies. Oftentimes, the purchasing department operates purely as an order processor and in doing soinadequately performs its strategic functions. What these types of purchasing departments can learn from the very successfulpurchasing organizations, including which best practices they can purposefully adopt and how they can benefit from theimplementation and regular utilization of these best practices, was identified in detail by Arthur D. Little in cooperation with theUniversity of St. Gallen and the German Federal Association of Materials Management, Purchasing and Logistics (BME) with the2010 PVE Study.
Arthur D. Little has been conducting an extensive purchasing
benchmarking study entitled “Purchasing Value Excellence”(PVE) in regular intervals since 2002. To date, over 600
purchasing organizations have taken part in this study. Since
2005, this study has been conducted in cooperation with theUniversity of St. Gallen. The objective is to identify the services
profile of a best practice purchasing organization fit for thefuture. Thus answers are sought to the following questions:nn

What are the central drivers of successful purchasingorganizations?

nnWhich best practices can less successful companies adopt
and implement?

Out of the maximum attainable point total of 1,750, the overall
winner was able to achieve about 1,500. When considering allindustries, the average mean was identified to be 725 points.
The following section presents several of the most interestingfindings and also contains specific recommended courses ofaction for achieving “excellence in purchasing”.
Figure 1. Performance fields ofPurchasing Value Excellence (PVE)

The existing findings are based on two datasets from different
time periods. The first group of participants took part in theyears 2006/2007, and the second group in 2009/2010. The study
participants were primarily from large and mid-sized companies.

Six PVE fields to measure purchasing performance
We grouped the purchasing service parameters into six perfor­­mance fields (figure 1). Within each performance field, parametersthat characterize a best practice purchasing organization wereidentified. These determining factors could be precisely identified
by directly comparing the best 25% of all purchasing organizations(top quartile according to overall performance pursuant to PVEpoint total) with the worst 25% (bottom quartile).

Source: Arthur D. Little

Operations Management Viewpoint

Price rate separates the wheat from the chaff
Price rate is one of the most important purchasing indices. It
presents the inflation-adjusted trend of purchasing prices during
the course of the year and is thus an index for the performanceof the purchasing department. The surveyed companies
reported a current average price rate of about –1.5% p.a. as
opposed to the –2% p.a. during the 2006/2007 time period. The
top quartile achieved a price rate of nearly –4%, while that of thebottom quartile was +0.2%. The most successful purchasingorganizations were apparently able to achieve very low pricerates, while the bottom quartile recorded price increases. The
composition of both quartiles by industry is relatively similarsuch that the price rate can’t be explained purely on the basis ofwhich industry the particular company falls under. This confirms
the assumption that a lower price rate is an indicator for a
successful purchasing organization.
The participants in the study further indicate that cost reductionaccounted for about 70% of the cost savings. That means that ina good two-thirds of the cases, the purchasing department canactually lower the purchasing prices. Cost avoidance (negotiatingwith a supplier to “talk them out of” their desired price increase)has about a 25% impact. With 5%, additional factors only play aminimal role in explaining the purchasing success (figure 2).

These strategies formulated by the majority of the participantsalso carries over into the structure. The identification of key
suppliers, with which a large percentage of purchasing volume ismaintained, is preferred over the price-driven practice of “cherrypicking”. However, an optimum key supplier quota cannot beidentified. The ideal number of large suppliers with which acompany covers 80% of their purchasing volume varies sharply
by industry.

From supplier assessment to supplier development
Long-term successful partnerships with suppliers are based on
two important pillars: supplier assessment/selection and supplierdevelopment. A standardized supplier assessment has become
the norm these days and as such is practiced by the top andbottom quartiles of the participants. Even though the bottom
quartile actually spends a larger percentage of time available
for the supplier management on the assessment (about 50%)
compared to the top quartile (about 40%), the larger investmentof time does not necessarily guarantee more success. Conversely,
the top quartile spends about 25% of the time on supplierdevelopment, whereas the bottom quartile only invests around
10% of the time. This means that long-term, successful supplierpartnerships are only possible if the relationship is intensively
developed and is not just evaluated as per the status quo.

Figure 2. Composition of purchasing success

Global sourcing opportunities already maxed out?

Other purchasing successes
7%

Cost
avoidance

24%

69%

Cost reduction
Taking of the sample in the 3rd and 4th Quarter of 2009
Source: Arthur D. Little

Long-term cooperation before short-term cost reduction
Today’s purchasing strategies and objectives are focused onlong-term and integrated approaches with cooperative basic
principles. 90% of the participants indicated that long-term
supplier relationships are “important” or “very important” tothem. A focus purely driven by price and short-term gain has lostits significance.
However, this is where considerable differences can beobserved between the top and bottom quartiles of thestudy participants: for example, the successful purchasing
departments nearly universally indicate that they take a total
cost of ownership approach with their suppliers (top quartile:“important” to “very important”: about 70%). Whereas over
80% of the study participants in the bottom quartile report they
follow this approach “somewhat” or “not at all”.
2 Worldclass Purchasing

With respect to global sourcing, most of the participants think
the ideal level has already been attained. About two-thirdsof the purchasing volume is purchased domestically, nearly
20% comes from the home continent and only about 15%of the volume stems from suppliers from other continents.
The companies do not anticipate a further expansion of nondomestic volume; however, there is no evidence of a trend
reversal back to near-sourcing either. 40% of the participants
record net savings resulting from global sourcing to be ≥5%(TCO observation). Thus, in spite of the higher logistic costs,
global sourcing continues to be one of the most effective ways
to reduce purchasing costs.

Purchasing in the planning process:The earlier, the better
Many purchasing organizations consider themselves to be limitedin their options because they are not included early enoughin the requirements planning. However, this is essential forpurchasing success. Only if the purchasing department is also
included in the requirements phase and can suggest early on, forexample, possible substitutes (suppliers or supplied parts), will
the overall optimum balance be effectively achieved between
the conflict of objectives that often exists between complete
satisfaction of all functional requirements on the one hand and an
economically adequate price on the other hand. This developmentof the purchasing department away from a reactive company

Operations Management Viewpoint

function (“ordering office”) towards a unit proactively functioning
throughout the requirements planning and procurement process,still poses a significant challenge to many companies even today.
This observation applied to nearly all participants in the study. For
example, the purchasing departments of the bottom quartile are
involved early on in the product specification process in only about
10% of the cases. Even though this percentage is higher in themost successful purchasing departments, the percentage is still
only around 60%.

a return on investment only after they reach a certain frequencyof the repetitive task – on the other hand, in many cases large
companies are also subjected to higher standardization pressurein order to maintain uniform processes throughout the entire
company. The utilization of IT systems is thus often the means
to satisfy this requirement.
As before, there continues to be room for improvement withrespect to online inquiries and online auctions. On average
about 20% of all inquiries are currently processed online, and forauctions it is actually only 5%.

Maverick buying: large companies lead the way
There are also opportunities for improvement in the percentageof the purchasing volume that is processed directly by therespective departments and does not flow through purchasing.
This so-called “Maverick buying” averages out to be 44% for
the bottom quartile, but in comparison only 5% for the topquartile. It is particularly noteworthy that the lower the Maverickbuying rate tends to be, the higher the purchasing volume of acompany is. Large companies often react with strict purchasing
policies (“No procurement allowed without the involvementof the purchasing department.”) in order to prohibit maverickbuying. Mid-sized companies that tighten their purchasing
policies with regard to Maverick buying could achieve potential
savings in this area.

Your way to achieve purchasing value ­excellence
The most successful companies of 2009/2010 werecharacterized bynn

the building of long-term, partnership supplier relationships
coupled with an intensive supplier development process,nn

the further integration of the purchasing organization into therequirements planning process as well asnn

the utilization of innovative IT systems to optimize processes,
to keep administration and repetitive, operational tasks to aminimum, and to invest the time gained in strategic functions.

How can your purchasing organization benefit from the findingsof the study? Basically, the first step should be to identify themost important action points for your company. To this end, allparticipants in the study (participating at a future date is also still
possible) receive a customized PVE benchmarking report thatcan be used to easily identify the areas of weakness specificto the company. This report shows the individual company’spurchasing performance in comparison to the average
performers within the industry as well as to the performanceof all study participants across the industries. Arthur D. Little
would be happy to provide support in the detailed identificationof opportunities for optimization. This is accomplished by way of
a workshop involving all relevant departments to be conducted

Automation and IT utilization hold promise for additional improvement potential
There is considerable room for improvement within the fieldof “technology” for most of the study participants. Manyadministrative tasks are still being performed manually although
there are adequate IT systems available on the market. Large
companies indicate a higher technology usage than the midsized companies. For example, the percentage of electronic
requisition requests is around 60% for large companies, whilein the other companies it is only 35%. On the one hand this is
the result of economies of scale – many IT investments exhibit

Figure 3. Role of the Purchasing Department in the planning process

Not involved

Implementation/effective execution

in a percentage

Advice/information

Decision/approval

Cooperation (active)
75696666
53413444383125 25

2203

Requirements
planning

9166Purchaserequisition

06

Definitionof supplierportfolio

Taking of the sample in the 3rd and 4th Quarter of 2009
Source: Arthur D. Little

3 Worldclass Purchasing25

190 06

Request for
proposal

0 06

Negotiation

25036Conclusionof contract

36916

Mandate222825

1931
16600

Incoming
goods

Accounting
controlOperations Management Viewpointdirectly on-site by a consultant with extensive experience. In
this workshop we can discuss optimization approaches, run
through scenarios of a successful implementation and present
the potential results.

ContactBernd Schreiber
schreiber.bernd@adlittle.com

Operational Performance Excellence framework (OPE)
Under the title of “Supply Chain Performance Excellence” and“Manufacturing Performance Excellence”, Arthur D. Little offers
comparably designed studies for logistics and production. With
the benchmarking studies “Marketing & Sales Excellence”,“Customer Services Performance Excellence”, and “Innovation
Excellence”, the operational excellence area is completelycovered.
The Operational Performance Excellence framework (OPE)
ensures that the proper drivers are addressed within thecompany. Strong areas are improved and positioned so thatthey can carry the company to the top. In the weak areas, theproblems are identified and effective optimization initiatives areconducted. The Operational Performance Excellence framework
propels the entire value added chain to performance excellenceby way of proven best practices. Increasing the efficiency andeffectiveness of the value added chain as well as synchronizing
the individual elements in an overarching manner cansignificantly improve the profitability of a company.

The study of Purchasing Value Excellence was conducted incooperation with the University of St. Gallen, Chair of Logistics
Management, and the German Federal Association of Materials
Management, Purchasing and Logistics (BME).

Companies interested in participating in the studies can doso at any time and request the respective benchmarking
questionnaire free of charge. The written assessment of
the results will then be sent to them by mail or alternatively
presented on-site. Comparing the company’s own methods andapproaches with the best practice methods provides a starting
point for achieving Operational Performance Excellence.

Arthur D. Little
Figure 4. Operational Performance Excellenceof Arthur D. Little
Purchasing
Value
Excellence
Manufacturing
Performance
ExcellenceMarketing& Sales
Excellence

Operational
Performance
ExcellenceInnovation
Excellence

Supply Chain
Performance
Excellence

Customer
Service
Performance
Excellence

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Source: Arthur D. Little

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