Overview
25 February 2008
19 February 2008
Supplier Performance Evaluation
Measurements drive behavior, from defining, monitoring to taking actions.
Traditional Measurement
Price, Delivery and Quality in an order.
Price
Established Price (Standard Accounting System) vs. Last Paid Price, Budget Amount, or Engineering Estimate (Target Cost Accounting Systems)
However, these comparison methods can lead to political games / behaviors which would distort the results.
Other better solutions include: Price Trends, Cost Savings / Cost Avoidance, Contribution to Profit, and Affordable Cost.
Price Trends as a Dynamic measurement, by showing context and history, is always better than static measurement
Cost Savings Report should include Prior Price, New Price, Date, Quantity, Unit Price, Extended Dollar Savings, and Description of How and Why.
Cost Avoidance is the remission of charges that are legitimate - that purchasing negotiates away and the supplier agrees to waive (e.g. legitimate penalty charges, set-up charges, and cost increases). Cost Avoidance Report should include Documentation of the Charges from the Supplier, the Final Settlement of the Charges, Total Dollar Savings, and Description of How and Why.
Contribution to Profit (A Bottom-Line Approach)
Five steps to determine Contribution to Profit:
1. Prepared a costed bill of material for an end product or service
2. Record all price changes to components in that bill of materials
3. Following reduction of cost, the total cost content will decrease
4. Following increase of cost, the total cost content will increase
5. Net difference in the total material cost content = Purchasing's contribution to profit, of that product
On-Time Delivery
Three considerations to measure delivery performance.
1. Data integrity is a major issue: Purchased Date vs. Supplier's Promise Date vs. Requester's Need Date
2. Definition of "on-time"
3. FOB point
Quality
Reject Rate of Incoming Inspection can not provide a complete picture of a supplier's quality performance. Right correlation of measurement between the supplier's and purchaser's quality system must be established in order to yield the same results.
Combining the Data
Using a cut-off score to determine supplier list by combining Objective and Subjective Acceptable Performance
Questioning
Continuous questioning whether price, delivery, and quality are sufficient to measure supplier's performance
Three advanced measures include Affordable Prices, Delivery When Needed, and Product Lifelong Quality Tracking (Through the Process and as Perceived by the End Customer)
Affordable Prices in a Changing Market
Cost Reductions, Process Improvements, Redesigns, and Material Substitutions as well as the Acceptability of Quoted Prices, can all be measured against the what is Affordable.
Is Inventory an Asset or Cost? The true cost of carrying inventory should plus overhead costs.
The Cost of Quality (Price of Nonconformance)
ABC (Activity-Based Costing) is helpful to seek the root causes of quality problems and understand the associated costs.
Measuring Total Cost Impact by combine Price, Delivery, and Quality into a single measure of Contribution to Profit.
Putting Cost, Performance, and Policy performance measurement All Together
Calculating Total Cost
Calculating Unit Total Cost Per to determine Unit Monetary Impact. Estimates and/or Approximations are acceptable as long as they are comparable and/or relatively valid.
Incorporating Cost of Nondelivery, Cost of Nonquality, and Leadtime into Total Cost calculation by using the nondelivery performance percentage as a price adder.
Measuring Subjective Performance by using percent nonperformance, Define and Track.
Unit Total Cost, which calculating cost factors, performance factors, and policy factors in dollars. Evaluating Unit Total Cost can be the basis of supplier selection and measurement of changing performance over time.
Using Unit Total Cost
Four business objectives to use Unit Total Cost
1. Combine disparate issues into coherent measurement plan
2. Allow all groups within an organization to access the supplier selection, measurement process, and ensure all issues are included
3. Clarify the basis of supplier selection and educate decision making behavior
4. Educate suppliers what and how performance matter
Measuring Service Suppliers
Potential difficulties:
1. Uncertain final product
2. Unrealistic and/or unclear expectations
3. Inconsistent assumptions
4. Personal perceptions
5. Changing job definition
6. Changing staffs within the organization and involved parties
7. Unforeseen
8. Changing funding
Purchasing's job is to assist all parties to define and incorporate their Performance Expectations, Costing Formulas, and Acceptance Criteria into the purchase order. Possible examples are as followings. However, it is important to track all the major issues.
1. What? define the project and its scope
2. Who? people and skills
3. Time frame
4. Progressing reporting
5. Acceptance criteria? when to be informed about the completion?
6. Legal issues
7. How are inevitable changes approved and documented?
8. How to determine costs?
9. Method of payment
Excerpt from: The Purchasing Handbook - A Guide for the Purchasing and Supply Professional
References & Readings:
Harding, M. L. ‘‘Creating Your Own Supplier Evaluation Formula,’’ Purchasing Today, November, 1997, pp. 12–13.
Harding, M. L. ‘‘Understanding Total Cost of Ownership,’’ NAPM InfoEdge, vol. I, no. 14, August 1996.
Harding, M. ‘‘Purchasing Performance Measurements on the Leading Edge,’’ NAPM InfoEdge, vol. 2, no. 5, January 1997.
Harding, M. and M. L. Harding, Purchasing, Barron’s Press, 1991.
Traditional Measurement
Price, Delivery and Quality in an order.
Price
Established Price (Standard Accounting System) vs. Last Paid Price, Budget Amount, or Engineering Estimate (Target Cost Accounting Systems)
However, these comparison methods can lead to political games / behaviors which would distort the results.
Other better solutions include: Price Trends, Cost Savings / Cost Avoidance, Contribution to Profit, and Affordable Cost.
Price Trends as a Dynamic measurement, by showing context and history, is always better than static measurement
Cost Savings Report should include Prior Price, New Price, Date, Quantity, Unit Price, Extended Dollar Savings, and Description of How and Why.
Cost Avoidance is the remission of charges that are legitimate - that purchasing negotiates away and the supplier agrees to waive (e.g. legitimate penalty charges, set-up charges, and cost increases). Cost Avoidance Report should include Documentation of the Charges from the Supplier, the Final Settlement of the Charges, Total Dollar Savings, and Description of How and Why.
Contribution to Profit (A Bottom-Line Approach)
Five steps to determine Contribution to Profit:
1. Prepared a costed bill of material for an end product or service
2. Record all price changes to components in that bill of materials
3. Following reduction of cost, the total cost content will decrease
4. Following increase of cost, the total cost content will increase
5. Net difference in the total material cost content = Purchasing's contribution to profit, of that product
On-Time Delivery
Three considerations to measure delivery performance.
1. Data integrity is a major issue: Purchased Date vs. Supplier's Promise Date vs. Requester's Need Date
2. Definition of "on-time"
3. FOB point
Quality
Reject Rate of Incoming Inspection can not provide a complete picture of a supplier's quality performance. Right correlation of measurement between the supplier's and purchaser's quality system must be established in order to yield the same results.
Combining the Data
Using a cut-off score to determine supplier list by combining Objective and Subjective Acceptable Performance
Questioning
Continuous questioning whether price, delivery, and quality are sufficient to measure supplier's performance
Three advanced measures include Affordable Prices, Delivery When Needed, and Product Lifelong Quality Tracking (Through the Process and as Perceived by the End Customer)
Affordable Prices in a Changing Market
Cost Reductions, Process Improvements, Redesigns, and Material Substitutions as well as the Acceptability of Quoted Prices, can all be measured against the what is Affordable.
Is Inventory an Asset or Cost? The true cost of carrying inventory should plus overhead costs.
The Cost of Quality (Price of Nonconformance)
ABC (Activity-Based Costing) is helpful to seek the root causes of quality problems and understand the associated costs.
Measuring Total Cost Impact by combine Price, Delivery, and Quality into a single measure of Contribution to Profit.
Putting Cost, Performance, and Policy performance measurement All Together
Calculating Total Cost
Calculating Unit Total Cost Per to determine Unit Monetary Impact. Estimates and/or Approximations are acceptable as long as they are comparable and/or relatively valid.
Incorporating Cost of Nondelivery, Cost of Nonquality, and Leadtime into Total Cost calculation by using the nondelivery performance percentage as a price adder.
Measuring Subjective Performance by using percent nonperformance, Define and Track.
Unit Total Cost, which calculating cost factors, performance factors, and policy factors in dollars. Evaluating Unit Total Cost can be the basis of supplier selection and measurement of changing performance over time.
Using Unit Total Cost
Four business objectives to use Unit Total Cost
1. Combine disparate issues into coherent measurement plan
2. Allow all groups within an organization to access the supplier selection, measurement process, and ensure all issues are included
3. Clarify the basis of supplier selection and educate decision making behavior
4. Educate suppliers what and how performance matter
Measuring Service Suppliers
Potential difficulties:
1. Uncertain final product
2. Unrealistic and/or unclear expectations
3. Inconsistent assumptions
4. Personal perceptions
5. Changing job definition
6. Changing staffs within the organization and involved parties
7. Unforeseen
8. Changing funding
Purchasing's job is to assist all parties to define and incorporate their Performance Expectations, Costing Formulas, and Acceptance Criteria into the purchase order. Possible examples are as followings. However, it is important to track all the major issues.
1. What? define the project and its scope
2. Who? people and skills
3. Time frame
4. Progressing reporting
5. Acceptance criteria? when to be informed about the completion?
6. Legal issues
7. How are inevitable changes approved and documented?
8. How to determine costs?
9. Method of payment
Excerpt from: The Purchasing Handbook - A Guide for the Purchasing and Supply Professional
References & Readings:
Harding, M. L. ‘‘Creating Your Own Supplier Evaluation Formula,’’ Purchasing Today, November, 1997, pp. 12–13.
Harding, M. L. ‘‘Understanding Total Cost of Ownership,’’ NAPM InfoEdge, vol. I, no. 14, August 1996.
Harding, M. ‘‘Purchasing Performance Measurements on the Leading Edge,’’ NAPM InfoEdge, vol. 2, no. 5, January 1997.
Harding, M. and M. L. Harding, Purchasing, Barron’s Press, 1991.
17 February 2008
Total Cost of Ownership
Total Cost of Ownership (TCO) is defined as a philosophy for developing an understanding of all relevant supply chain related costs of a particular transaction or process. TCO considers total cost of acquisition, use/administration, maintenance, and disposal of a given item or service.
How Does TCO Compare to Other Approaches? Price!
TCO from a supplier's perspective: From produce to delivery, there are labor, packaging, raw materials, overhead, and transportation.
TCO from a buyer's perspective: It includes purchase price, transportation, duties, and on-time delivery. Other challenging issues such as the cost of failures working with suppliers and further required education, training, and administrative support.
Why the Interest in TCO?
Besides Reduction of TCO becomes the main concern to establish Strategic Alliances, other reasons facilitate TCO as the key model include Advanced Information Systems, Reduction of Supply Base, Outsourcing, Development of Activity-Based Cost Management (ABCM), Discovery of "Hidden" Cost Drivers Discovery, and the Increasing Importance of Supply Chain Management.
Choosing a Project for TCO Analysis
TCO does not fit to every purchase or process analysis. However, in order to pursue early success, as following list is a good initiative approach to start a TCO project.
Characteristics of Item for Pilot TCO Project (*Source: See below, References & Readings)
1. The firm spends a relatively large amount of money on that item.
2. The firmpur chases the itemwith some degree of regularity, in order to provide some historical data, but more importantly, to allow opportunities to gather current cost data.
3. Purchasing believes the itemhas significant transaction costs associated with it that are not currently recognized.
4. Purchasing believes that one or more of the currently unrecognized transaction costs are individually significant.
5. Purchasing has the opportunity to have an impact on transactions costs, via negotiation, changing suppliers, or improving internal operations.
6. Those purchasing/using the item will cooperate in data gathering to learn more about the item’s cost structure.
Types of TCO Analysis
Two general approaches to perform TCO analysis: A One-Time Project Analysis or a Computerized, Ongoing System.
One-Time Project Analysis is primarily customized and used to support a specific decision-making situation, e.g. Outsourcing, Reducing Supply Base, Forming Alliances, Looking for Areas for Improvement/Cost Drivers, and Selecting key Suppliers.
On the other hand, less common Computerized System is ideal for analyzing repeating purchases, e.g. raw materials, packaging, MRO, and supplies. This ongoing system is used to Allocate Volume among Suppliers, Provide Suppliers Feedback, Focus on Areas for Improvement/Cost Drivers, and Cost Products/Services. However, this automated TCO approach works best while tied to ABCM system.
Getting Started
1. Identify a promising project for TCO analysis
2. Team setting, cross-functional and/or cross-company team (e.g. purchasing, finance/accounting, users, key stakeholders, and any functional/technical experts)
3. Keep a reasonable scope of TCO analysis (benefit exceeds costs of Pre-Transaction, Transaction, and Post-Transaction)
4. Perform sensitivity analysis to determine relevant costs
Major Categories for the Components of TCO (*Source: See below, References & Readings)
1. Pre-Transaction: Identify need, Investigate sources, Qualify sources, Adding suppliers to internal systems, Education, and Contract process
2. Transaction: Price, Order placement, Delivery, Duties, Payment, Inspection, Returns of parts, and Follow-up & correction
3. Post-Transaction: Line fallout, Defective finished goods rejected before sales, Field failures, Repair/replacement in field, Cost of repair parts, Cost of maintenance & repairs, Cost of disposal, and Disposal
Implementation Issues
1. Demonstrate TCO philosophy as a superior way to manage and understand costs, (e.g. a successful TCO pilot project)
2. Based on TCO components, expend efforts on: Process flowchart, Determine significant cost components, Determine calculating & monitoring method, Compile cost component data, and Analyze the results
3. Identify where to start its TCO effort
4. Determine how and where to implement TCO in the organization
Continuously Improving TCO
TCO projects should be reanalyzed and audited continuously, e.g. 6 months to a year. Nevertheless, it is also essential to increase TCO's visibility and recognition in the organization by monitoring and reporting TCO project results.
Level of TCO Analysis:
Strategic: improve process, Tactical: work on supplier improvement, and Operational: manage and measure suppliers
Excerpt from: The Purchasing Handbook - A Guide for the Purchasing and Supply Professional
References & Readings:
Carr, L. P., and C. D. Ittner. ‘‘Measuring the Cost of Ownership.’’ Journal of Cost Management, Fall 1992, pp. 42–51.
Cavinato, J. L., ‘‘A Total Cost/Value Model for Supply Chain Competitiveness.’’ Journal of Business Logistics, vol. 13, no. 2, 1992, pp. 285–301.
L. M. Ellram, ‘‘A Framework for Total Cost of Ownership,’’ International Journal of Logistics Management, vol. 4, no. 2, 1993, pp. 49–60.
L. M. Ellram, ‘‘A Structured Method for Applying Purchasing Cost Management Tools,’’ International Journal of Purchasing and Materials Management, vol. 32, no. 1, 1996, pp. 20–28.
L. M. Ellram, ‘‘Activity Based Costing: An Opportunity for Purchasing Improvement,’’ In A Changing Environment: 80th Annual International Purchasing Conference Proceedings, NAPM, Tempe, Ariz., 1995, pp. 1–5.
L. M. Ellram, ‘‘Activity Based Costing and Total Cost of Ownership: A Critical Linkage.’’Journal of Cost Management, Winter 1995, pp. 22–30.
L. M. Ellram, "Total Cost Modeling in Purchasing," Center for Advanced Purchasing Studies, Tempe, Arizona, 1994.
L. M. Ellram, ‘‘Total Cost of Ownership.’’ In D. Hahn and L. Kaufmann, ed., Handbuch Industrielles Beschaffungsmanagement, Gabler, Wiesbaden, 1999.
L. M. Ellram, ‘‘Total Cost of Ownership: An Analysis Approach for Purchasing.’’ International Journal of Physical Distribution and Logistics Management, vol. 25, no. 8, 1995, pp. 4–20.
L. M. Ellram, ‘‘Total Cost of Ownership: Elements and Implementation.’’ International Journal of Purchasing and Materials Management, vol. 29, no. 4, 1993, pp. 3–11.
L. M. Ellram and A. Maltz, ‘‘The Use of Total Cost of Ownership Concepts to Model the Outsourcing Decision,’’ International Journal of Logistics Management, vol. 6, no. 2, 1995, pp. 55–66.
L. M. Ellram and O. R. V. Edis, ‘‘A Case Study of Successful Partnering Implementation,’’ International Journal of Purchasing and Materials Management, vol. 32, no. 4, Fall 1996, pp. 20–28.
L. M. Ellram and S. P. Siferd, ‘‘Total Cost of Ownership: A Key Concept in Strategic Cost Management Decisions,’’ Journal of Business Logistics, vol. 19, no. 1, 1998, pp. 55–84.
Maltz, A., and Ellram, L. M., ‘‘Total Cost of Relationship: An Analytical Framework for the Logistics Outsourcing Decision.’’ Journal of Business Logistics, vol. 17, no. 1, 1997.
P. Bennett, ‘‘ABM and the Procurement Cost Model,’’ Management Accounting, March 1996, pp. 28–32.
T. Hendrick and L. M. Ellram, Strategic Supplier Partnerships: An International Study, Center for Advanced Purchasing Studies, Tempe, Arizona, 1993.
How Does TCO Compare to Other Approaches? Price!
TCO from a supplier's perspective: From produce to delivery, there are labor, packaging, raw materials, overhead, and transportation.
TCO from a buyer's perspective: It includes purchase price, transportation, duties, and on-time delivery. Other challenging issues such as the cost of failures working with suppliers and further required education, training, and administrative support.
Why the Interest in TCO?
Besides Reduction of TCO becomes the main concern to establish Strategic Alliances, other reasons facilitate TCO as the key model include Advanced Information Systems, Reduction of Supply Base, Outsourcing, Development of Activity-Based Cost Management (ABCM), Discovery of "Hidden" Cost Drivers Discovery, and the Increasing Importance of Supply Chain Management.
Choosing a Project for TCO Analysis
TCO does not fit to every purchase or process analysis. However, in order to pursue early success, as following list is a good initiative approach to start a TCO project.
Characteristics of Item for Pilot TCO Project (*Source: See below, References & Readings)
1. The firm spends a relatively large amount of money on that item.
2. The firmpur chases the itemwith some degree of regularity, in order to provide some historical data, but more importantly, to allow opportunities to gather current cost data.
3. Purchasing believes the itemhas significant transaction costs associated with it that are not currently recognized.
4. Purchasing believes that one or more of the currently unrecognized transaction costs are individually significant.
5. Purchasing has the opportunity to have an impact on transactions costs, via negotiation, changing suppliers, or improving internal operations.
6. Those purchasing/using the item will cooperate in data gathering to learn more about the item’s cost structure.
Types of TCO Analysis
Two general approaches to perform TCO analysis: A One-Time Project Analysis or a Computerized, Ongoing System.
One-Time Project Analysis is primarily customized and used to support a specific decision-making situation, e.g. Outsourcing, Reducing Supply Base, Forming Alliances, Looking for Areas for Improvement/Cost Drivers, and Selecting key Suppliers.
On the other hand, less common Computerized System is ideal for analyzing repeating purchases, e.g. raw materials, packaging, MRO, and supplies. This ongoing system is used to Allocate Volume among Suppliers, Provide Suppliers Feedback, Focus on Areas for Improvement/Cost Drivers, and Cost Products/Services. However, this automated TCO approach works best while tied to ABCM system.
Getting Started
1. Identify a promising project for TCO analysis
2. Team setting, cross-functional and/or cross-company team (e.g. purchasing, finance/accounting, users, key stakeholders, and any functional/technical experts)
3. Keep a reasonable scope of TCO analysis (benefit exceeds costs of Pre-Transaction, Transaction, and Post-Transaction)
4. Perform sensitivity analysis to determine relevant costs
Major Categories for the Components of TCO (*Source: See below, References & Readings)
1. Pre-Transaction: Identify need, Investigate sources, Qualify sources, Adding suppliers to internal systems, Education, and Contract process
2. Transaction: Price, Order placement, Delivery, Duties, Payment, Inspection, Returns of parts, and Follow-up & correction
3. Post-Transaction: Line fallout, Defective finished goods rejected before sales, Field failures, Repair/replacement in field, Cost of repair parts, Cost of maintenance & repairs, Cost of disposal, and Disposal
Implementation Issues
1. Demonstrate TCO philosophy as a superior way to manage and understand costs, (e.g. a successful TCO pilot project)
2. Based on TCO components, expend efforts on: Process flowchart, Determine significant cost components, Determine calculating & monitoring method, Compile cost component data, and Analyze the results
3. Identify where to start its TCO effort
4. Determine how and where to implement TCO in the organization
Continuously Improving TCO
TCO projects should be reanalyzed and audited continuously, e.g. 6 months to a year. Nevertheless, it is also essential to increase TCO's visibility and recognition in the organization by monitoring and reporting TCO project results.
Level of TCO Analysis:
Strategic: improve process, Tactical: work on supplier improvement, and Operational: manage and measure suppliers
Excerpt from: The Purchasing Handbook - A Guide for the Purchasing and Supply Professional
References & Readings:
Carr, L. P., and C. D. Ittner. ‘‘Measuring the Cost of Ownership.’’ Journal of Cost Management, Fall 1992, pp. 42–51.
Cavinato, J. L., ‘‘A Total Cost/Value Model for Supply Chain Competitiveness.’’ Journal of Business Logistics, vol. 13, no. 2, 1992, pp. 285–301.
L. M. Ellram, ‘‘A Framework for Total Cost of Ownership,’’ International Journal of Logistics Management, vol. 4, no. 2, 1993, pp. 49–60.
L. M. Ellram, ‘‘A Structured Method for Applying Purchasing Cost Management Tools,’’ International Journal of Purchasing and Materials Management, vol. 32, no. 1, 1996, pp. 20–28.
L. M. Ellram, ‘‘Activity Based Costing: An Opportunity for Purchasing Improvement,’’ In A Changing Environment: 80th Annual International Purchasing Conference Proceedings, NAPM, Tempe, Ariz., 1995, pp. 1–5.
L. M. Ellram, ‘‘Activity Based Costing and Total Cost of Ownership: A Critical Linkage.’’Journal of Cost Management, Winter 1995, pp. 22–30.
L. M. Ellram, "Total Cost Modeling in Purchasing," Center for Advanced Purchasing Studies, Tempe, Arizona, 1994.
L. M. Ellram, ‘‘Total Cost of Ownership.’’ In D. Hahn and L. Kaufmann, ed., Handbuch Industrielles Beschaffungsmanagement, Gabler, Wiesbaden, 1999.
L. M. Ellram, ‘‘Total Cost of Ownership: An Analysis Approach for Purchasing.’’ International Journal of Physical Distribution and Logistics Management, vol. 25, no. 8, 1995, pp. 4–20.
L. M. Ellram, ‘‘Total Cost of Ownership: Elements and Implementation.’’ International Journal of Purchasing and Materials Management, vol. 29, no. 4, 1993, pp. 3–11.
L. M. Ellram and A. Maltz, ‘‘The Use of Total Cost of Ownership Concepts to Model the Outsourcing Decision,’’ International Journal of Logistics Management, vol. 6, no. 2, 1995, pp. 55–66.
L. M. Ellram and O. R. V. Edis, ‘‘A Case Study of Successful Partnering Implementation,’’ International Journal of Purchasing and Materials Management, vol. 32, no. 4, Fall 1996, pp. 20–28.
L. M. Ellram and S. P. Siferd, ‘‘Total Cost of Ownership: A Key Concept in Strategic Cost Management Decisions,’’ Journal of Business Logistics, vol. 19, no. 1, 1998, pp. 55–84.
Maltz, A., and Ellram, L. M., ‘‘Total Cost of Relationship: An Analytical Framework for the Logistics Outsourcing Decision.’’ Journal of Business Logistics, vol. 17, no. 1, 1997.
P. Bennett, ‘‘ABM and the Procurement Cost Model,’’ Management Accounting, March 1996, pp. 28–32.
T. Hendrick and L. M. Ellram, Strategic Supplier Partnerships: An International Study, Center for Advanced Purchasing Studies, Tempe, Arizona, 1993.
Purchasing Performance Evaluation
"You can's manage it if you can't measure it." Performance measurement must move from a focus on functional measurement to an integrated approach and improve supply chain performance.
Importance of Performance Measurement
By monitoring the business health of a business or a department, or diagnose short-term problems, a good performance measurement provides individual and organizational appraisal and feedback systems to shape purchasing strategies and problems.
Purposes for Individual Measurement
1. Drive strategies and actions
2. Appraise behavior
3. Motivate employees
4. Reinforce behavior
5. Reward behavior
Purposes Organizational Measurement
1. Determining how well purchasing and supply is meeting business objectives
2. Helping set realistic purchasing and supply objectives
3. Evaluating purchasing and supply management effectiveness
4. Aiding in making self-assessments
5. Gauging movement toward improvement
6. Providing incentives for improvement
7. Spoting operational problems early
8. Establishing criteria for success, such as contributions to profitability and customer satisfaction
Business Objectives - Profitability
1. ROA / Return on Assets
2. Stockholder Equity
3. EPS / Earnings Per Share
4. Stock Value
5. After-tax Profit
CEO's Top Five Measures of Purchasing Effectiveness
1. Quality of purchased items
2. Key supplier problems that could affect supply
3. Supplier delivery performance
4. Internal customer satisfaction
5. Purchase inventory dollars
Establishing Purchasing and Supply Objectives
Develop a Purchasing and Supply Organization Plan: Some purchasing goals that align with company goals could include:
1. 100% incoming quality of purchased materials and supplies
2. Maintaining good supplier relations
3. Minimizing inventory investment
4. Achieving 100% on-time delivery of key materials and suppliers
5. Maintaining good relationships with internal customers
6. Minimizing the Total Cost of Ownership or materials and equipment
Review Purchasing and Supply Organization: Analyzing organizational situation by clarifying present/future status and whether the current structure could achieve purchasing and supply objectives
1. Are purchasing and supply policies, programs, and practices aligned with company goals and objectives?
2. What are the specific roles, relationships, responsibilities, and authority of corporate, division, plant/satellite purchasing and supply employees?
3. What is the present relationship between purchasing & supply and senior management?
4. How effective is the purchasing and supply organization's structure?
5. Are adequate purchasing and supply coordination and control mechanisms in place?
6. How well does purchasing and supply interact and communicate with internal customers and internal suppliers?
7. What are current relationships with key suppliers?
8. Is the current purchasing and supply performance measurement system aligned with company goals and objectives?
9. Do purchasing and supply employees have the adequate skills, education, and knowledge to meet company goals and objectives? If not, what will be required to improve the situation?
Evaluation: Guidelines for Measure Development
While review existing measures and developing new measures, which should be further tailored to individual organization. 7 tips to keep in mind:
1. Be meaningful to the organization
2. Be aligned with business objectives
3. Be representative of trends and progress
4. Be consistent with other groups withing the organization
5. Integrate financial and non-financial information
6. Measure what is important to customers
7. Adapt to changing customer demands
Development and Implementation of Measures
Three steps to development and implement a useful performance measurement system: Database Development, Setting Priorities, and Measurements. Performance measurement should be based on contribution to profits, but includes quantitative and qualitative criteria.
Main areas should be measured: Contribution to Profit, Supplier Performance, Quality Measures, Delivery, Supplier Management, and Other Measures.
Contribution to Profit: To pursue cost savings, measures should look at total cost to buy and install an item. Install costs include Delivery/Leadtime, Incoming Inspection, Assembly Time, and Rework Time. Other measures could include: Throughput, Inventory Turnover, Return on Assets, and Distribution of Dollars Expended on Resources.
Other Measures: Measure of service are related to delivery, quality, and profitability. Common service measures include:
1. Internal customer satisfaction
2. Accurate record keeping
3. Responsive to changing situations
4. Administrative cost reduction
5. Participation/success of supplier development programs
6. Participation/success of supplier certification programs
7. Success of cross-functional development activities
Trend Analysis
CEOs wanted trend analysis, e.g. Actual Delivery vs. Required Delivery, on all measures with the exception of supplier partner development. Other trends can catch management attention are:
1. Time to qualify a supplier
2. Actual quality compared to targeted quality
3. Quality improvement compared to target goals
4. Cost of quality (prevention, appraisal, internal failures, and external failures)
5. Lead time reduction
6. Total cost of acquisition compared to total cost of use
7. Actual cost compared to goal (target and benchmark)
8. Orders delivered directly to factory floor
Benchmarking
Benchmarking should focus on critical processes which have direct impact on company goals and objectives.
Reward Systems
Reward systems should connect to climbing the corporate ladder, salary structure, additional status, incentives, and benefits. Different types of individual rewards include Salary-/Skill-based Pay Systems and Incentive Pay. However, group-based incentives are becoming more appropriate, e.g. Profit Sharing, Gain Sharing, and Employee Stock Ownership Plans (ESOPs) or Stock Options.
Conclusions
Organizations should develop measures tailored to individuals' needs. Measurement itself will not change performance, but as a basis to add value and provide information combined with action plans can facilitate continuous improvement.
Excerpt from: The Purchasing Handbook - A Guide for the Purchasing and Supply Professional
References & Readings:
H. E. Fearon and W. A. Bales, Measures of Purchasing Effectiveness, Center for Advanced Purchasing Studies (CAPS), Tempe, AZ, 1997
M. Harding, ‘‘Purchasing Performance Measurements on the Leading Edge,’’ NAPM InfoEdge, January 1997, p. 2.
M. Pagell, A. Das, S. Curkovic, and L. Easton, ‘‘Motivating the Purchasing Professional,’’ International Journal of Purchasing and Materials Management, Summer 1996, pp. 27–34.
West PalmBeach FL , 1996
Tempe Arizona
Importance of Performance Measurement
By monitoring the business health of a business or a department, or diagnose short-term problems, a good performance measurement provides individual and organizational appraisal and feedback systems to shape purchasing strategies and problems.
Purposes for Individual Measurement
1. Drive strategies and actions
2. Appraise behavior
3. Motivate employees
4. Reinforce behavior
5. Reward behavior
Purposes Organizational Measurement
1. Determining how well purchasing and supply is meeting business objectives
2. Helping set realistic purchasing and supply objectives
3. Evaluating purchasing and supply management effectiveness
4. Aiding in making self-assessments
5. Gauging movement toward improvement
6. Providing incentives for improvement
7. Spoting operational problems early
8. Establishing criteria for success, such as contributions to profitability and customer satisfaction
Business Objectives - Profitability
1. ROA / Return on Assets
2. Stockholder Equity
3. EPS / Earnings Per Share
4. Stock Value
5. After-tax Profit
CEO's Top Five Measures of Purchasing Effectiveness
1. Quality of purchased items
2. Key supplier problems that could affect supply
3. Supplier delivery performance
4. Internal customer satisfaction
5. Purchase inventory dollars
Establishing Purchasing and Supply Objectives
Develop a Purchasing and Supply Organization Plan: Some purchasing goals that align with company goals could include:
1. 100% incoming quality of purchased materials and supplies
2. Maintaining good supplier relations
3. Minimizing inventory investment
4. Achieving 100% on-time delivery of key materials and suppliers
5. Maintaining good relationships with internal customers
6. Minimizing the Total Cost of Ownership or materials and equipment
Review Purchasing and Supply Organization: Analyzing organizational situation by clarifying present/future status and whether the current structure could achieve purchasing and supply objectives
1. Are purchasing and supply policies, programs, and practices aligned with company goals and objectives?
2. What are the specific roles, relationships, responsibilities, and authority of corporate, division, plant/satellite purchasing and supply employees?
3. What is the present relationship between purchasing & supply and senior management?
4. How effective is the purchasing and supply organization's structure?
5. Are adequate purchasing and supply coordination and control mechanisms in place?
6. How well does purchasing and supply interact and communicate with internal customers and internal suppliers?
7. What are current relationships with key suppliers?
8. Is the current purchasing and supply performance measurement system aligned with company goals and objectives?
9. Do purchasing and supply employees have the adequate skills, education, and knowledge to meet company goals and objectives? If not, what will be required to improve the situation?
Evaluation: Guidelines for Measure Development
While review existing measures and developing new measures, which should be further tailored to individual organization. 7 tips to keep in mind:
1. Be meaningful to the organization
2. Be aligned with business objectives
3. Be representative of trends and progress
4. Be consistent with other groups withing the organization
5. Integrate financial and non-financial information
6. Measure what is important to customers
7. Adapt to changing customer demands
Development and Implementation of Measures
Three steps to development and implement a useful performance measurement system: Database Development, Setting Priorities, and Measurements. Performance measurement should be based on contribution to profits, but includes quantitative and qualitative criteria.
Main areas should be measured: Contribution to Profit, Supplier Performance, Quality Measures, Delivery, Supplier Management, and Other Measures.
Contribution to Profit: To pursue cost savings, measures should look at total cost to buy and install an item. Install costs include Delivery/Leadtime, Incoming Inspection, Assembly Time, and Rework Time. Other measures could include: Throughput, Inventory Turnover, Return on Assets, and Distribution of Dollars Expended on Resources.
Other Measures: Measure of service are related to delivery, quality, and profitability. Common service measures include:
1. Internal customer satisfaction
2. Accurate record keeping
3. Responsive to changing situations
4. Administrative cost reduction
5. Participation/success of supplier development programs
6. Participation/success of supplier certification programs
7. Success of cross-functional development activities
Trend Analysis
CEOs wanted trend analysis, e.g. Actual Delivery vs. Required Delivery, on all measures with the exception of supplier partner development. Other trends can catch management attention are:
1. Time to qualify a supplier
2. Actual quality compared to targeted quality
3. Quality improvement compared to target goals
4. Cost of quality (prevention, appraisal, internal failures, and external failures)
5. Lead time reduction
6. Total cost of acquisition compared to total cost of use
7. Actual cost compared to goal (target and benchmark)
8. Orders delivered directly to factory floor
Benchmarking
Benchmarking should focus on critical processes which have direct impact on company goals and objectives.
Reward Systems
Reward systems should connect to climbing the corporate ladder, salary structure, additional status, incentives, and benefits. Different types of individual rewards include Salary-/Skill-based Pay Systems and Incentive Pay. However, group-based incentives are becoming more appropriate, e.g. Profit Sharing, Gain Sharing, and Employee Stock Ownership Plans (ESOPs) or Stock Options.
Conclusions
Organizations should develop measures tailored to individuals' needs. Measurement itself will not change performance, but as a basis to add value and provide information combined with action plans can facilitate continuous improvement.
Excerpt from: The Purchasing Handbook - A Guide for the Purchasing and Supply Professional
References & Readings:
H. E. Fearon and W. A. Bales, Measures of Purchasing Effectiveness, Center for Advanced Purchasing Studies (CAPS), Tempe, AZ, 1997
M. Harding, ‘‘Purchasing Performance Measurements on the Leading Edge,’’ NAPM InfoEdge, January 1997, p. 2.
M. Pagell, A. Das, S. Curkovic, and L. Easton, ‘‘Motivating the Purchasing Professional,’’ International Journal of Purchasing and Materials Management, Summer 1996, pp. 27–34.
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