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procurement benchmarking

Why benchmarking is the lazy answer

Price benchmarking happens all the time, but is that because it’s good practice or because it’s a lazy, easy, placebo?

Some price benchmarking is made against “industry data”, mainly generic reports that provide some guide on pricing in a particular field. Other benchmarking may be made against a specific set of data, for example a consultancy using anonymous data from another engagement. The issue with these is that the data is usually either too generic, or too specific to another company to be meaningful.

At other times price benchmarking is achieved by obtaining quotes from alternative suppliers. This is particularly dangerous. Going to the supply base on a benchmarking exercise immediately suggests there is no real intent to move away from the current supplier. Many suppliers will figure this out and therefore quotes will be all over the place, from the low-ballers trying to stir things up, to the high quotes from suppliers who have no incentive to really try, and anything in between, rendering the data meaningless.

In addition there are the issues created by treating the supply market badly. Buyers often embrace the notion of maintaining good relationships with suppliers, but regularly overlook the benefits of good relationships with the supply market in general – their potential future suppliers. Frequently asking for quotes just to go back and negotiate with an incumbent is certainly not a good way to build relationships with either the market or the incumbent.

So what’s the alternative? A robust sourcing and ongoing category management process should give confidence that the market price is being met and eliminate the need for benchmarking, with the ongoing management being particularly key. It’s not the easy way, but the benefits (which will be far broader than just good pricing) will be worth it.