Purchasing Return on Investment (ROI) a Valuable but Underutilized Metric

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Purchasing ROI is an easy metric to calculate with can be used for Strategic Planning and Forecasting, Bench marking, as well as monitoring on going activities.

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Purchasing Return on Investment (ROI) a Valuable but Underutilized Metric

  1. 1. Purchasing ROI A Valuable but Underutilized Metric Bill Kohnen Consider adding Purchasing ROI to your key reportable metrics B Kohnen August 2013
  2. 2. Why Purchasing ROI? • It is Easy to calculate • It demonstrates positive impact of a professional Purchasing group • Can be used to determine value of additional “investments” in Purchasing • Can benchmark within industry and with others • Good for justifying reasonable software solutions for indirect and T &E space • Tendency to focus value of Purchasing on cost savings/avoidance • Must be viewed in combination with absolute savings measure • Possible to “favorably” manipulate # for short term gain • Do not allow to be overused for justifying “Big Dollar Software as a cure” + - B Kohnen August 2013
  3. 3. Calculate Purchasing ROI Cost Saving + Cost Avoidance Purchasing Operations Cost • Any ROI above 1 is coming out ahead • Average Purchasing ROI is 5.5 • Having a huge ROI could be the result of putting few resources into purchasing • Problem is “Purchasing activities could be happening unaccounted for in higher cost less efficient areas. (Engineering, IT, Operations) B Kohnen August 2013
  4. 4. Also Look at Savings & Avoidance Per Million in Spend • This is important because ROI alone does not tell the total story. • Investing more which would bring down ROI may be logical to increase savings • Average Savings/Avoidance per million is $43,400 • Usefull for predicting future savings potential but still need to adjust for spend categories, market conditions, growth, new products etc. (Cost Saving + Cost Avoidance) – Purchasing Operations Expense Total Spend X $1,000,000 B Kohnen August 2013
  5. 5. Benchmark Information Industry Average Aerospace Financial Services Mining/Metals Petroleum Pharmaceutical Semiconductor Utilities ROI (Saving+Avoidance/Purchasing opex Ex) 5.57 2.58 17.71 3.89 6.04 7.47 5.50 4.65 Total Contrbution per million spend $ 43,400 $ 36,900 $ 56,800 $ 15,900 $ 39,300 $ 34,300 $ 35,100 $ 28,800 Industry Purchasing ROI Financial Services 17.71 Pharmaceutical 7.47 Petroleum 6.04 Average 5.57 Semiconductor 5.5 Utililites 4.65 Mining Metals 3.89 Aerospace 2.58 Industry Savings Per Million Spend Financial Services 56,800$ Average 43,400$ Aerospace 43,400$ Petroleum 39,300$ Semiconductor 35,100$ Pharmaceutical 34,300$ Utililites 28,800$ Mining Metals 15,900$ Source Data from CAPs Research Cross Industry Report of Standard Benchmarks 2012 Financial Services included in benchmark since they are part of original data set however their numbers are outliers on all measures raising some suspicion. Also note that Financial Services spend as % of revenue is only 17% compared to average of 47% for all others. B Kohnen August 2013

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