ISM - Past Conference Materials - Benchmarking of Purchasing: How to Reach "Best Practice" in Supply

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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:

What are we doing right now?
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.

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%

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

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