Key Takeaways

• Comparing a company's procurement processes with those of industry peers is essential to accurately gauge performance.
• Combining internal key performance indicators (KPIs) with external benchmarking provides a comprehensive view of both current performance and areas for improvement.
• Benchmarking identifies strengths, weaknesses, opportunities, and threats (SWOT), improves strategic planning, and helps manage risks by aligning with industry best practices.
• Reliable benchmarking data should be taken from a variety of sources and should be regularly updated using best practices for maximum effectiveness.
• Continuous benchmarking is necessary to adapt to changing market conditions and innovate procurement processes.

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Introduction

A divisional president from a multinational aerospace and defense company during a business review in 2001 asked how his organization’s procurement team compared on cost management best practices.  

His team answered, “We’re best in class!”  

He responded, “Compared to whom?”  

“Compared to the other divisions within the corporation,” his team said.

“Did you benchmark any companies outside of ours within aerospace or from other industries?” the president asked.

“No.”

His next response defines why benchmarking is such a powerful tool: “Being the best of the worst is nothing to be proud of. Since we only benchmarked against ourselves, we really have no idea how good or bad we really are. Go benchmark a range of other corporations and then we will have a conversation on how good or bad we really are.”  

Over the next two years, this company delivered superior results and became a benchmark target for other corporations in the industry as it pioneered new techniques for procurement and defined what best in class looked like.

As the above example illustrates, benchmarking in procurement involves comparing a company’s performance to other organizations across industry. It provides a snapshot of where a company stands relative to competitors and offers insights into where improvements may be required.  

In our previous post, we discussed the importance of combining lagging and leading indicators to optimize procurement team strategy. While such KPIs are useful tools, they provide a primarily internal view of the performance of your supply chain. Benchmarking, meanwhile, provides a valuable outside comparison to gauge where your company’s people, processes, enabling technology, and performance are in relation to other organizations. Taken together with internal KPIs, benchmarking can provide a complete picture of both past performance and future potential.

In this post, we will look at the importance of benchmarking for procurement as well as provide sources and best practices for benchmarking data.

Benchmarking in Procurement

In procurement, benchmarking can be used to compare supplier performance, procurement costs, lead-times, quality, on-time, productivity, safety, compliance, and other key metrics against external standards. It helps organizations understand their strengths, weaknesses, threats, and opportunities, all key elements of a traditional SWOT analysis. Benchmarking also forms an informational foundation for other strategy tools like Porter’s Five Forces, which shows the relative leverage in the marketplace that a buyer or seller may have.

Procurement professionals benefit from benchmarking as it highlights where they stand in the marketplace and offers a roadmap for improvement. It helps ensure competitiveness and reduces the risk of falling behind. Often, companies which are not direct competitors are willing to create benchmark networks to learn and share best practices. Together, the information exchange helps the participating organizations gain valuable insights, lessons learned, and best practices. This process allows for improvements and validation of strategies.  

Benefits of benchmarking include:

• Identifying Strengths, Weaknesses, Opportunities, and Threats: Benchmarking allows organizations to see how they compare to others within their specific industry segment, or to industry leaders in general, providing a clear understanding of areas where they lead, meet expectations, and or need improvement.  Benchmarking is a valuable tool in conducting a traditional yet proven SWOT analysis. Additionally, benchmarking offers valuable information for organizations trying to assess their purchasing power in the buyer-seller dynamic. This knowledge may be instrumental in planning and executing sourcing strategy, bid methodology, and negotiations.
• Insights into Strategic Planning and Risk Management: Benchmarking offers a lens into risks by identifying gaps between an organization’s procurement processes and industry best practices. It also supports strategic planning by pointing out key areas for growth.
• Improving Procurement Maturity: Benchmarking helps procurement organizations assess their maturity in areas such as skills, process, and technology, offering insights into how far along they are in optimizing their procurement processes and practices. The goal is to identify improvement opportunities in order to realize value for the organization.

Sources and Best Practices of Benchmarking Data

Sources of Benchmarking Data

Organizations can obtain benchmarking data from multiple sources, including platforms like Avetta, independent research firms like McKinsey, and industry-specific reports like those from the Institute for Supply Management (ISM). Many of today’s SaaS solutions in supply chain management (SCM) and procurement also have analytics capabilities that offer benchmarking comparisons of suppliers, categories, and industries. This information is valuable when the team analyzes it deeply, looking at past performance (scorecards) and future needs to take action on strategy around people, process, and technology to drive outcomes.

Best Practices for Benchmarking in Procurement

• Identify your benchmarking goals: The key to effective benchmarking is to (a) define what the function hopes to gain from the exercise, and (b) ensure that the benchmarks constitute a legitimate baseline that offers realistic and actionable information. ‍
• Use a variety of sources: Seek benchmarks from many sources. An organization may artificially appear stronger than reality if the benchmarks are not carefully selected from a wide range of sources. Seeking diversity of viewpoints helps organizations think outside the box to drive innovation. ‍
• Continual Use of Benchmarking Data: To get the most out of benchmarking, procurement specialists should regularly compare their performance against the best-in-class, identify actionable insights, and adapt their strategy to address any identified weaknesses. Benchmarking should never be a “one time” effort.  Minimum once a year, if not biannually or quarterly depending on the scope is best practice. We operate in a dynamic world where the business environment is always changing. Innovation and disruptive technologies present opportunities and risks all the time. Benchmarking allows organizations to identify trends and build strategies to address them, faster and more precisely.
• Leverage Tools Like Avetta: Procurement teams can use platforms like Avetta to benchmark their performance against industry peers and gain valuable insights into how they can improve efficiency, reduce costs, and mitigate risks.

Conclusion

Benchmarking is an essential tool for procurement professionals. It enables organizations to stay competitive, understand their place in the market, and strategically plan for future growth and risk mitigation. By setting goals, using a wide variety of sources, and leveraging modern tech platforms, procurement teams can lay the foundations for a data-informed continual improvement process that can greatly increase the efficiency and maturity of your procurement organization.  

In our next post, we’ll discuss just what such a continual improvement process should look like.

Join Avetta at SAP Spend Connect in Las Vegas from October 14-18 to learn more about how benchmarking can drive procurement success. We will be presenting two sessions on Leveraging Insights to Design Sustainable and Resilient Supply Chains and Driving Performance: Effective Strategies to Navigate Supply Chain Risk. Speak with our experts and discover how Avetta’s tools can help your organization take advantage of industry-leading data and insights.

Avetta is a SaaS software company providing supply chain risk management solutions. Avetta’s platform is trusted by over 130,000 suppliers in over 120 countries. Visit Avetta.com to learn more about our supplier prequalification solutions.

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