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Benchmarking of Purchasing: How to Reach "Best Practice" in Supply



85th Annual International Purchasing Conference & Educational Exhibit

New Orleans, Louisiana
May 2000

Author(s):

Prof. Dr. Habil Ulli Arnold

Prof. Dr. Eberhard E. Scheuing

Benchmarking of Purchasing:
How to Reach "Best Practice" in Supply


Monday, May 1, 2000, 4:15 - 5:30 p.m.
Session CR
and
Tuesday, May 2, 2000, 3:55 - 5:10 p.m.
Session FJ


ISM’s 85th Annual International Purchasing Conference
April 30 - May 3, 2000
New Orleans


Prof. Dr. Habil Ulli Arnold

University of Stuttgart, Germany

Prof. Dr. Eberhard E. Scheuing

St. John’s University, New York



Basics of Benchmarking: The 8i-Model


The Phases of the 8i-Model

i1: Identification

Phase 1 evaluates the status quo of the purchasing function:

  1. What are we doing right now?
  2. How are we doing it today?
  • Defining so-called master purchasing processes

  Master process Cost driver Proportion of total purchasing time in %
(basis: total purchasing manpower)
      CompA CompB CompC CompD CompE
1. Strategic pricing/supplier management with existing parts Active part 30% 23% 25% 10% 25%
  1.1 Supplier development and quality management Supplier (in 1) 8% (in 1) 20% 0%
  1.2 Optimization of material flow Part (in 1) 2% (in 1) 5% 10%
2. Operative Purchasing: Disposition of material within existing contracts Part 0% 21% 0% 1% 10%
3. Completion of single purchasing instructions (volume < 10 KDM) Purchase order 7% 15% 5% 25% 5%
4. Completion of single purchasing instructions (volume > 10 KDM) Purchase order 5% 8% 1% 5% 15%
5. Global sourcing Purchase Volume 8% 5% 10% 1% 5%
6. Supply of new parts Part (in 1) 7% 30% 7% 15%
7. Projects (incl. outsourcing) mandays 25% 8% 16% 18% 10%
8. Planning and reporting Project 10% 3% 8% 3% 5%
  Subtotal   85% 100% 95% 95% 100%
  Activities not connected with the master processes mentioned above   15% 0% 5% 5% 0%
  Total   100% 100% 100% 100% 100%


The Phases of the 8i-Model

i2: Information

Information is the core of benchmarking.

  1. Starting point: Total cost of the procurement function

    Cost pattern Company A Company B Company C Company D Company E
    Overhead 13% 5% 15% 5% 9%
    Secondary costs 9% 4% 6% 17% 3%
    Primary costs 78% 91% 79% 78% 88%
    (staff costs share of prim. c.) [93%] [94%] [92%] [88%] [93%]
    Total 100% 100% 100% 100% 100%

  2. Breaking cost structure down to master processes

      Comp. A Comp. B Comp. C Comp. D Comp. E

    Æ

      DM / cost driver DM / cost driver DM / cost driver DM / cost driver DM / cost driver DM / cost driver
    1. Strategic pricing/supplier management with existing parts 51.40 48.40 56.80 106.20 47.80 62.10
    1.1 Supplier development and quality management - 1313.4 - 204.90 - 759.20
    1.2 Optimization of material flow - 92.00 - 34.50 - 63.30
    2. Operative Purchasing: Disposition of material within existing contracts - 44.30 - 346.40 30.30 140.30
    3. Completion of single purchasing instructions (volume < 10 KDM) 21.20 23.40 10.00 16.40 35.90 21.40
    4. Completion of single purchasing instructions (volume < 10 KDM) 937.60 321.90 254.20 924.30 445.20 576.60
    5. Global sourcing 107.20 33.30 - 14.20 184.00 84.70
    6. Supply of new parts 377.10 355.80 610.40 51.50 552.10 389.40
    7. Projects (incl. outsourcing) 771.30 509.00 780.00 689.90 597.50 669.50
    8. Planning and reporting 1.40 0.50 0.90 0.10 0.80 0.70

  3. Analyzing the cost differences by process analysis (see Excel sheet)


The Phases of the 8i-Model

i3: Illustration

Showing the necessity of change as a result of the benchmarking process by using illustration tools like the "cockpit information system" of
Bosch Telecom


The Phases of the 8i-Model

i4: Integration

Integration of best practices regarding the possibility of transformation


The Phases of the 8i-Model

i5: Investing

Adapting best practices often requires investments in purchasing (computer systems, employee training etc.) to lower total cost in the long run.


The Phases of the 8i-Model

i6: Installation

Adoption of best practices runs together with the installation of an electronic procurement system


The Phases of the 8i-Model

i7: Implementation

By implementing the results of benchmarking, purchasing changes from a cost center to a center of excellence within the company


The Phases of the 8i-Model

i8 Intensifying

Establishing best practices is a process of continuous improvement.

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