A case study for centralised purchasing - World Class Operational Procurement

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Centralised Purchasing.jpgPart 10 of a ten-part series that examines key operational aspects of the so-called “Purchase to Pay” value chain
by Independent Contributor, Peter Alkema – Head: Purchase to Pay at Absa

During 2008 at a large South African bank, a purchasing hub was set up to centrally process and support all ordering from the bank’s branches with a skilled SAP SRM team that is accessible through a single, easy to remember number. 

The total value of purchase orders that this team has processed since being set up in August 2008 is R100million. These purchase orders were processed on behalf of nearly 700 business areas and branches across the organisation. In 2009 the plan is to continue rolling out to other business units in the organisation in order to maximise coverage and generate further volume through the team. As a world class operational procurement initiative, it is important to assess key benefits that have been achieved in order to continually benchmark and evaluate performance.

“Conservative benchmarks for actual benefits delivered through such an initiative are 3% of volume, meaning that for the example quoted above, the initiative has already paid for itself. Commitments that were made to secure funding for launching the project have been achieved, and further investment to keep the unit running generate net benefits. Centralising processing in this way also generates better Management Information (MI) that allows even more advanced measurement and tracking of the performance of such a unit over time”, Peter Alkema, Head: Purchase to Pay, Absa, told SmartProcurement. The measures listed below further indicate the success of this team.


Customer satisfaction:

The expectation of any person calling the centralised purchasing team is to have a purchase order processed on their behalf, provided they are able to provide the required information. All the calls received were tracked and the ratio of purchase orders created was measured against the total number of calls. Perfect customer satisfaction would be indicated by a score of 100%, meaning that all calls corresponded (on average) with the processing of a purchase order. In this case study the score is 83%, meaning that 83% of all calls have resulted in a purchase order being created to satisfy the caller's needs. The score is actually higher, since a number of query related calls were also received.


Cost of processing:

Previously the average cost of processing a purchase order in the organisation had exceeded R600. Because of the success of this initiative, this cost was brought down to around R450 for processing orders, due largely to economies of skill and scale. With greater volume through the hub over time, this will result in compounding further reductions in cost of processing per purchase order, in addition to proportionate additional savings on additional volume. This confirms the well-known hypothesis that the more a group of people repeat a certain set of tasks, the better and more efficient they get at completing them.


Average time taken per purchase order:

Attrition and bandwidth problems in the branches of this particular bank had previously meant that purchase orders were taking as long as 2-3 days to complete. The implementation of the purchasing hub has reduced this to an average total turnaround time of 24 hours, with actual processing time being a fraction of what it used to be. To illustrate this, one example is quoted from a Branch Manager: "I have the pleasure to inform you that telephone ordering is a great initiative. Previously it took me almost 5 hours to order for my branch, but now it takes me only a few minutes to place my order."


Volume of processing:

Importantly, the volume of purchasing achieved by the hub is indicative of the saturation of the new purchasing model across the organisation, and in any environment where such an initiative is implemented. The value purchased by the hub in 2008 from 1,126 purchase orders was R47.1million, or an average of R41,000 per order. The volume in 2008 was comparatively low because the project was ramping up, while volumes achieved so far in 2009 (until mid March) indicate a projected full year total purchase order value of over R200million. The graph below shows the number and the value of total orders per month until mid March 2009.

Alkema Graph.jpg

“While it may be counter-intuitive to centralise processing on a system that is designed to be used decentrally, this example is proof that in certain cases key benefits can be achieved. For a proportionately low cost base, with ever increasing volumes of processing, easily measurable metrics can be used to demonstrate and show evidence of why such an initiative will lead to continued improvements of world class operational procurement”, Alkema concluded.

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