Research

Benchmark report: A snapshot of cross-industry trends in purchasing

With this issue Knowledge@ W. P. Carey inaugurates a series of stories about the benchmark reports issued by CAPS Research, a research center co-sponsored by the W. P. Carey School of Business and the Institute of Supply Management. The first, its cross-industry report, reveals trends that have been developing over time. "The reports offer companies the opportunity to take a snapshot of where they are relative to their peers," says Steven Wade, director of benchmarking programs.

2007-03-14

Companies across industries ranging from aerospace and defense to utilities report overall that they're hiring more purchasing employees, paying those employees higher salaries, and spending more on training, according to a recently released benchmarking study.

The study — "Report of Cross-Industry Standard Benchmarks: Comparing Data from Fiscal Years 2003, 2004, and 2005" — was issued in March, 2007 by CAPS Research, a supply management research organization that's jointly sponsored by the W. P. Carey School of Business and the Institute for Supply Chain Management.

The benchmarking survey

CAPS Research creates its benchmarks through surveys of companies (many of them in the Fortune 500) in 20 industry sectors: aerospace/defense, chemical, computer hardware, computer software, diversified foods and beverages, Department of Energy/NNSA contractors, electronics, engineering/construction, financial services, health care products, industrial manufacturing, leisure — lodging and restaurants, metals and mining, petroleum, pharmaceuticals, retail, semiconductor, telecommunication services, transportation services, and utilities.

Companies use the CAPS Research benchmarks as broad measures — yardsticks rather than tools, to determine world-class metrics or to generate best practices examples. "The reports offer companies the opportunity to take a snapshot of where they are relative to their peers," says Steven Wade, director of benchmarking programs at CAPS Research and author of the March, 2007 cross-industry benchmarking report.

"What's most valuable in the cross-industry report," Wade says, "is information revealing overall trends over time. Those trends offer a broad barometer for organizations to measure how they're doing on these key benchmarks over time." The most recent report covers fiscal years 2003, 2004, and 2005. The years listed in the report — 2004, 2005, and 2006 — are the years in which the data was collected. (see list of benchmarks below)

Cross-industry differences

Wade cautions that the cross-industry benchmarks are just a starting point for companies looking to see where they stand relative to their peers. He says that CAPS Research's industry-specific reports offer a much better means for comparison, as differences across industries can vary significantly. A good example of the differences between industry sectors is represented by the benchmark that measures purchasing departments' spending per employee.

"The aerospace/defense industry sector, and the Department of Energy/NNSA group continuously report the least spend per purchase employee. The three-year averages for these two industry sectors are $5.54 million and $4.47 million, respectively. At the other end of the spectrum, the three-year average purchase spend for the diversified foods/beverages industry sector is $36.78 million per purchase employee," Wade writes in the March, 2007 cross-industry report.

The difference, Wade explains, is due to the way purchasing is conducted in the different industries. "In an industry like diversified foods/beverages or retail, purchasing experts are responsible for a large percentage of the company's direct spend. In aerospace, purchasing is done primarily through contracting, which is usually not under the purview of the purchasing department," Wade says.

Salary and hiring trends

The most popular and controversial benchmark, Wade says, measures purchasing departments' operating expenses per employee. "There are very few large companies who calculate their purchase operating expense in the same manner," writes Wade. Although the benchmark doesn't allow an exact apples-to-apples comparison (more like a Fuji-to-McIntosh Apple comparison, says Wade), it does measure the overall trend in operating expenses per employee.

The data reflect an upward trend — "purchase operating expenses are generally increasing despite the fact that some purchasing functions are being moved offshore as a cost savings measure or the need to be closer to key suppliers," writes Wade. Overall, he says, salaries for new hires are rising and company executives are increasingly being included in the purchasing purview (where they weren't before), bringing up the average per-employee salary level. Those upward trends offset the decreasing employee costs that come from companies moving purchasing activities offshore.

The study also reports an upward trend in purchase employees as a percent of company employees. That benchmark increased from 1.22 percent in 2004 to 1.45 percent in 2005 and 2.72 percent in 2006. Wade cautions that while some of the increase is due to new growth, some is also due to organizational realignment.

"We see an increase in the relative share of purchase employees as organizations are placing more emphasis on the overall responsibility of purchasing departments — they're consolidating activities, listing people as purchasing employees who weren't previously," Wade says. "Nevertheless, there is also an increasing trend in new purchasing hires."

Training

Another popular benchmark measures average annual spending on training per purchasing employee. Wade attributes its popularity to the fact that it is a quick barometer of the overall health of a company. "Training is one of the first budget items to be cut when times are tough, and one of the last items to be added when times are good," he says.

So the upward trend in training spending that companies reported from 2004 to 2006 suggests that companies overall are healthy and that they're paying more attention to the professional needs and requirements of their supply management staff.

Purchasing offshore

CAPS Research introduced a number of new benchmarks in its 2007 report, including one that covers the percent of purchasing dollars respondents spend offshore. "The corresponding survey question asks participants to report the total spend that was outside of their organization's country of origin," writes Wade.

Across all industries, companies reported spending 22.09 percent of their purchasing dollars offshore. "The observations ranged from a low of less than one percent reported by utilities industry participants to a high of 64.09 percent (computer hardware)," Wade writes. It makes sense that utility companies spend much less offshore, Wade says, because most of their costs relative to power generation, transmission, and distribution are domestic (onshore).

In contrast, companies with a high percentage of purchase spend offshore tend to be manufacturing-intensive industries — computer hardware and software, electronics, and semiconductors, for example. Overall, Wade sees an increasing trend toward global buying. "It is indeed a global economy," he says.

Strategic alliances and supplier consolidation

The CAPS Research report also suggests a trend toward supplier consolidation. The benchmark is calculated by dividing the number of a company's active suppliers that account for 80 percent of its purchase spending by the company's total number of active suppliers. It has been decreasing over time — from 9.39 percent in 2004 to 7.73 percent in 2005 to 7.61 percent in 2006.

In other words, overall, companies are spending most of their money with fewer suppliers. "Over time, as companies become more strategically aligned with key suppliers, their total number of active suppliers decreases — as does the number of suppliers accounting for 80 percent of total purchase spend," explains Wade.

Diversity suppliers

Measuring how they're doing compared to their peers in terms of purchasing from minority- and woman-owned suppliers is also important to companies, Wade says. CAPS Research reports that the percent of purchase spending with diversity suppliers increased from 7.73 percent in 2004 to 9.40 percent in 2005, then decreased to 7.61 percent in 2006. But Wade says that 2005's 9.40 percent average is "an anomaly." "The real average, consistent over the last three years, is just under 8 percent," he says.

That's lower than businesses' general goal of 9-10 percent. "For companies engaged in federal contracting, they must spend at least 10 percent of their purchase dollars with diversity suppliers," Wade explains. "And 10 percent is a number that's generally endorsed by organizations that support diversity suppliers — it's considered the socially responsible point to be at for fostering the growth of diversity businesses."

Purchasing technologies

CAPS Research reports a number of benchmarks relating to purchasing technologies — asking respondents about purchase spending via eProcurement, eAuctions, and procurement cards. eProcurement encompasses purchasing transactions and/or sourcing activities that are conducted through web-based technologies. While only 20.47 percent of respondents' total spending was via eProcurement, Wade says that the trend is toward a paperless environment, where all purchase transactions are conducted through web-based technologies.

Respondents spend far less via eAuctions — reverse auctions in which certain pre-qualified suppliers are invited to bid electronically to supply a given order. In 2006, respondents reported spending 3.24 percent of their total purchase spending via eAuctions. Nevertheless, an upward trend reflects an increasing desire to leverage eAuctions as a purchasing tool. Procurement cards are similar to debit or credit cards, issued to individuals with purchasing responsibilities.

They account for the smallest percentage of respondents' total spending — 1.86 percent in 2006. Wade explains that's due in part to the fact that procurement cards are generally used for smaller-value purchases. But the data reveal an upward trend reflecting increasing use of procurement cards.

Points of comparison

Wade says that the benchmarks are not designed to offer across-the-board prognoses of the general health of businesses or the economy. Instead, businesses should look to the benchmarks for information on how they compare to companies within their peer groups — to analyze what they may be doing right or wrong.

General trends indicate that firms are hiring more employees, paying those employees more, spending more on training, becoming more strategically aligned with a few key suppliers, and adopting more technology-based purchasing tools. Companies that aren't on track with those trends may do well to look at what's going on inside their purchasing departments.

Bottom line

• CAPS Research benchmarks are designed to be broad measures — yardsticks by which firms can measure where they are relative to their peers.
• Cross-industry benchmarks are just a starting point for firms looking to analyze their relative performance; because results can vary widely across industries, firms should also look at industry-specific reports.
• Purchase operating expenses are trending upward despite the cost savings achieved by moving some purchasing functions offshore.
• The relative share of purchase employees to total company employees is trending upward because of increases in hiring as well as organizational realignments.
• Companies are spending more, on average, over time on training.
• The amount of purchasing dollars spent offshore varies widely between industries.
• Companies are becoming more strategically aligned with a few key suppliers.
• Companies are generally spending less than the 10 percent goal for dollars spent with diversity suppliers.
• Companies are increasingly turning to technology-based purchasing tools, including eProcurement, eAuctions, and procurement cards.

The benchmarks included in the report are:

1. Purchase spend as a percent of sales dollars
2. Purchase operating expense as a percent of sales dollars
3. Purchase operating expense as a percent of purchase spend
4. Purchase operating expense per purchasing employee
5. Purchase employees as a percent of company employees
6. Purchase spend per purchase employee
7. Managed purchase spend per purchase employee
8. Percent of purchase spend managed/controlled by purchasing
9. A. Percent of companies who reported outsourcing some of their purchasing activities; B.Percent of managed spend outsourced
10. A. Percent of purchase spend offshore; B. Percent of purchase spend onshore
11. Average annual spend on training per purchase employee
12. Cost avoidance as a percent of total purchase spend
13. Cost reduction as a percent of total purchase spend
14. Percent of active suppliers that account for 80 percent of total purchase spend
15. Percent of purchase spend with diversity suppliers
16. Percent of active suppliers who are eProcurement enabled
17. Percent of purchase spend via eProcurement
18. Percent of purchase spend via eAuctions
19. Percent purchase spend via procurement cards
20. Percent purchase spend via strategic alliances

Business analytics Supply Chain Faculty