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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