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.

1. Purchasing ROI
A Valuable but Underutilized Metric
Bill Kohnen
Consider adding Purchasing ROI to your key
reportable metrics
B Kohnen
August 2013

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. 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. 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. 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