Benchmarking

Very different prices are often paid for the same goods and services, and large companies do not always have the best agreements. One reason is certainly the insufficient training of some buyers in negotiation skills. Incomprehensibly, more salespeople are still trained in successful selling than buyers in successful negotiating.

Forecasts of the price trend

However, the reason for excessively high prices is inadequate monitoring of volatile markets. But deficits in training and market observation are easy to remedy. The Swiss Association for Purchasing and Supply Management procure.ch supports companies in both areas. (see box).

Purchasing managers have already been successfully using the benchmarks in strategic and operational processes for many years and use them to monitor current trends and price risks in the respective markets. With regard to the current market situation and previous price developments, short and long-term forecasts are made about the further price development, which allow concrete recommendations for the selection of a suitable procurement strategy and the most favorable purchasing time.

Instruments for market monitoring Offers and invitations to tender

Classic market observation is carried out by obtaining offers by telephone or in writing. Increasingly, this instrument is being supplemented or replaced by invitations to tender via the Internet. Due to the time and expense involved, many goods and services are only put out to tender once or twice a year. In volatile markets, this is a risk that should not be underestimated.

Price indices and benchmarks

This is a major disadvantage of tendering, so that more and more companies are also using price indices and benchmarks.

Price indices

Price indices provide a quick overview of the current market situation. With regard to the origin of the data, there are two types of indices: those fed by sellers or those fed by buyers. The latter include, for example, the indices for raw materials, steel, electricity, gas or freight in the respective price mirrors of the BME. Data suppliers for prices actually paid are members of the purchasing associations BME or procure.ch. Indices for prices should contain either only contract rates or only spot rates, because these are two different submarkets.

Price indices are formed from average values; individual prices cannot be identified. Nevertheless, they are very useful because you can quickly see whether your own prices are still close to the current market prices, i.e. whether you are still "in trend". The usefulness of external price indices is particularly high if one has internal indices that are similar in structure to the external ones. It is quite easy to create internal indices because all the necessary data are available. In future, the comparison of external with internal indices should be part of every buyer's market observation toolkit. However, for finer investigations taking into account individual prices and quantities, the instrument of benchmarking is needed in addition.

Price benchmarking

Price benchmarking compares prices paid by buyers, as opposed to quotations and tenders. Common practice is for buyers to provide BME, for example, with their agreed net prices for steel, energy, C-parts, transport, parcel and express services, and fleet and travel management. The BME saves the data, compares them with each other and prepares the comparison results in such a way that each participant can see where they stand in the market for each product or service (Figure 1).

A detailed comparison of prices is only meaningful if the respective customer value of the benchmark participants is included in the analysis of the results. Therefore, the information on prices must be linked to information on quantity over a period of time. In practice, this period is predominantly the calendar year.

For benchmarking, a quarterly rhythm has proven successful, unless prices fluctuate strongly. In this case, a more frequent price comparison can be useful, especially if price reductions exceed the costs of benchmarking.

Key figures as a performance indicator for purchasing

The internal view is also necessary. With a system of key figures, management, controlling and procurement receive a set of instruments that not only reflects the performance of purchasing, but also controls it. Benchmarking can be a tool to develop purchasing into a strategic corporate variable, into a function that not only carries out order processing, but also makes value contributions.

Key figures in purchasing are often collected irregularly and are not analyzed systematically. Moreover, the focus is usually on operational key figures, while strategic key figure systems are disregarded. That is why key figures should be used: 

• Determination of the status quo: A quantitative and qualitative evaluation of the purchasing organization through neutral key figures leads to more transparency regarding processes and costs in purchasing.

Purchasing - strategic size

• Efficiency measurement: The anonymous comparison with companies of the same industry group and size provides neutral, reliable statements about the quality of one's own purchasing organization.
• Optimisation: "Looking beyond the end of your nose" allows you to quickly identify potential for improvement.

In this way, the fulfilment of certain criteria can be defined as a success factor for higher performance and operational instruments can be used to increase efficiency in the sense of best practice.

Continuous controlling

In addition to its information and control function, the KPI system also serves as an early warning mechanism by monitoring the development of processes and costs, allowing critical points in purchasing performance to be identified.

Since 2007, the BME has been determining the "TOP key figures" for measuring efficiency and effectiveness in purchasing (Figure 2). In addition to the average values per industry and turnover class, the best-in-class values were also created in 2010, which provide valuable information for the derivation of "best practice". The focus was placed on the key performance indicators. The significance of the results increases when the average values are compared with the best-in-class. As it turns out, best-in-class organizations sometimes have values that are about 50 percent better than the average.

With 176 participants representing a purchasing volume of almost 200 billion euros and around 20,000 employees in purchasing from all industry groups and company sizes, the "TOP key figures in purchasing" have a re-

Representative and high benefit

presentational character. Significant developments over the past five years include two values in particular:

1. purchasing costs as a percentage of purchasing volume

This key figure very strongly reflects the efficiency of the processes in procurement and the associated costs. Compared to the beginning of the survey, this value improved significantly. Although the value rose by around five percent in the crisis year 2009, this was not least due to the lower procurement volume. In 2010, this value improved by around ten percent compared to the previous year; it is currently below the level of 2008. Measures introduced in 2009 only took effect in 2010 and the purchasing volume increased by around five to ten percent at the same time. Alongside the key figure "cost of the ordering process", this is the key performance indicator for the efficiency of purchasing processes.

2. complaint rate and adherence to delivery dates

It is imperative that these metrics are used for target setting by buyers. They show a clear link to the profit contribution of purchasing and its ability to recognize and promote the performance of suppliers. The five percent complaint rate (peak value in the automotive industry) means approximately five million euros for a misperformance in a purchasing volume of 100 million euros, for which appropriate personnel for supplier qualification could easily be financed. In 2011, the on-time delivery rate of around 80 percent was alarmingly poor, which should lead to supplier development measures that can be quickly amortized.

Today, the benchmark services of the BME are a uniformly recognized standard for measuring the efficiency of processes and organization in purchasing and at the same time an expression of performance in the industry. The benefit of regular market observation and the measurement of efficiency in the company pays off in any case, because it is far above their costs.