Thought this research is quite interesting for trying to work out your ROI for a potential new ERP software solution saying that your procurement budget has to be large.
Greater Supply Base Consolidation Yields Greater ROI for Procurement
According to the Hackett Group, reporting in its latest “Procurement Book of Numbers,” there is a direct correlation between a decrease in the number of suppliers/billion of spending and decreased total procurement cost as a percentage of spending. Each reduction of 2,000 suppliers per billion of spending generates savings of more than 5 percent of overall procurement costs.
Most importantly, Hackett found that when companies reduce the number of their suppliers, they are able to focus proportionately more of their resources on building stronger, more strategic, relationships with the resulting effect that they are able to simultaneously gain purchasing leverage and lower the cost of ongoing supplier monitoring and management.
According to Hackett, if 80 percent of a company’s annual spend is spread across 20 percent of its suppliers, every dollar spent on procurement translates into $2.10 of spend reduction. For a typical company with 1 billion in spending, this translates into an annual spend reduction of $21.5 million derived from a 10.1 million investment in the procurement function. But if companies concentrate their annual spend across less than 2.5 percent of their suppliers, the ratio of spend reduction to procurement process costs is over 5 to 1. In other words, that same company could realize an annual spend reduction of $51.4 million, doubling the previous savings figure and increasing the procurement function’s return on investment to over 500 percent.
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