Purchasing Management PDF

PURCHASING MANAGEMENT Dr. Ghada W. El-tazy LEARNING OUTCOME  Issuesthat arise with procurement performance measurement  The main factor influencing procurement performance measurements (KPIs)  Why measure procurement performance?  How to assess procurement performance?  Measuring procure...

PURCHASING MANAGEMENT Dr. Ghada W. El-tazy LEARNING OUTCOME  Issuesthat arise with procurement performance measurement  The main factor influencing procurement performance measurements (KPIs)  Why measure procurement performance?  How to assess procurement performance?  Measuring procurement performance: key areas  INTRODUCTION  As has been described in the previous chapters, procurement is no longer just the traditional source-order- pay cycle, it has grown into a strategic business function that plays an important part in the business’s growth strategy.  The procurement mission and strategies need to be reviewed and reformulated, and need to be translated into clear procurement targets and actions before implementation can start. Finally, these targets and actions need to be measured and monitored in terms of the actual results that they accrue. The question is, however, how to monitor and measure these procurement results, both at the business unit level and the corporate level. Which key performance indicators (KPIs) should be incorporated in?  ISSUES THAT ARISE WITH PROCUREMENT PERFORMANCE MEASUREMENT  Measuring procurement performance is not so easy as it sounds. As, it is one of the least developed areas and many companies struggle with it. Some of the issues that arise are: 1. Targets and objectives that would need to guide procurement performance activities are ambiguous and not understood in the company. 2. Important elements of procurement performance (e.g. ROI contribution, cash savings or risk management) are missing or not covered by KPIs. 3. KPIs are insufficiently supported by up-to-date IT systems, which impedes regular and consistent performance reporting, resulting in a lack of credibility and support of both procurement staff and business management.  THE MAIN FACTOR INFLUENCING PROCUREMENT PERFORMANCE MEASUREMENTS (KPIS)  One of the most important factors that influences the way in which procurement results are measured is how management looks upon the role and the importance of the procurement function:  Operational, administrative activity (Transactional orientation). In this case management evaluates procurement operations primarily on parameters such as number of orders issued, number of late deliveries, number of stock-outs, etc.  THE MAIN FACTOR INFLUENCING PROCUREMENT PERFORMANCE MEASUREMENTS (KPIS)  Strategic business function (Value chain orientation). Here, procurement is actively involved in deciding on the company’s future business strategy and how to strengthen the company’s competitive position. It is actively engaged in make-or-buy studies leading to outsourcing decisions. Local suppliers are consistently put to the test of international competition. Here, management evaluates procurement on a number of aspects including the number of new (international) suppliers being contracted, its contribution to the bottom line in terms of savings realized and its contribution to the top line in terms of new business revenues generated through suppliers (e.g. new product development, time-to-market improvement).  THE MAIN FACTOR INFLUENCING PROCUREMENT PERFORMANCE MEASUREMENTS (KPIS)  Depending on the prevailing view, the role and position of the procurement department will differ, and the measures used for managing procurement’s performance will differ significantly.  When procurement is seen as an operational function, performance measures are largely quantitative and administrative in character.  On the other hand, when procurement is considered to be a strategic business function, performance measures are also qualitative and strategic. In this case, a complex framework of procedures and guidelines typically is used to monitor progress against specific plans to improve procurement effectiveness.  WHY MEASURE PROCUREMENT PERFORMANCE?  Procurement performance evaluation will lead to better decision-making since it identifies variances from planned results; these variances can be analyzed to determine their causes and action can be taken to prevent their occurrence in the future.  It may lead to better communication with other departments, e.g. analyzing the number of invoices that cannot be matched with a purchase order (PO) leads to better arrangements in payment procedures and improves mutual understanding between the procurement department and financial administration.  WHY MEASURE PROCUREMENT PERFORMANCE?  It creates transparency, as regular reporting of actual versus planned results enables a buyer to verify whether their expectations, i.e. targets, have been realized. This provides constructive feedback to the buyer and it also provides information to management about individual and group performance, and hence contributes to the recognition of the procurement department.  It may contribute to better motivation, as a properly designed performance evaluation system can meet the personal and motivational needs of the buyer. It can be used effectively for constructive goal setting, and motivational and personal development programmes in procurement.  HOW TO ASSESS PROCUREMENT PERFORMANCE?  In order to decide what should be measured, it is necessary first to define procurement performance. Procurement performance is considered to be the outcome of two elements: procurement effectiveness and procurement efficiency.  HOW TO ASSESS PROCUREMENT PERFORMANCE?  Procurement effectiveness The extent to which, by choosing a certain course of action, a previously established goal or standard is being met.  Procurement efficiency Related to the resources which are required to realize the previously established goals and objectives and their related activities. Essentially, it refers to the relationship between planned and actual costs.  Procurement performance can thus be considered as the extent to which the procurement function is able to realize its predetermined goals at a minimum of the company’s resources, i.e. costs.  HOW TO ASSESS PROCUREMENT PERFORMANCE?  Procurement effectiveness is thus related to the goals and objectives of the procurement function. The classical statement summarizing the overall objectives of the procurement function is that it should obtain the right material, in the right quantity, from the right supplier, at the right time, at the right place and at the right price. Next, procurement should contribute to product and process improvement in order to reduce the company’s overall supply (chain) risk.  Procurement efficiency relates to the resources which are required in order to meet the objectives that have been set for the procurement function. Therefore, efficiency relates to the procurement organization. I.e., the way procurement is organized and whether people are productive in performing their procurement jobs. Next, efficiency also relates to having high quality supplier relationships in place that result in superior supplier performance. To make this happen it is important that suppliers are satisfied with the working relationships they have with their customers.  MEASURING PROCUREMENT PERFORMANCE: KEY AREAS  PRICE/COST DIMENSION:  Price/cost control. Refers to the continuous monitoring and evaluation of prices and price increases as they are charged by suppliers. The main objective here is to monitor prices in order to control them and to prevent them getting out of hand.  Price/cost reduction. Relates to the continuous monitoring and evaluation of activities initiated to reduce costs in a structured way associated with purchased materials and services. Cost reduction may be the result of searches for new suppliers or substitute materials or co-ordination of procurement requirements among business units.  Budgets and cost savings reports are important instruments for performance planning and monitoring with regard to the price/cost dimension.  MEASURING PROCUREMENT PERFORMANCE: KEY AREAS PRODUCT QUALITY DIMENSION:  Procurement’s contribution to total quality management. After product specifications have been released it is procurement’s job to ensure that goods and services ordered are delivered according to the specifications. Here, parameters are being used such as reject rates on incoming goods, number of supplier quality agreements, number of ISO certified suppliers, etc. These measures indicate to what extent the company is able to secure a flawless incoming materials from suppliers.  Procurement’s involvement in new product development. This relates to procurement’s contribution to product innovation. Measures to be used here are the number of hours spent by procurement on innovation projects, the number of engineering hours spent by suppliers. Measures of these activities will indicate why new product development projects are becoming out of control both in terms of costs and time-to-market.  MEASURING PROCUREMENT PERFORMANCE: KEY AREAS  SUPPLIER RELATIONSHIP DIMENSION:  Operational supplier relationship measures. Examples are supplier price versus targeted price, supplier quality, supplier invoice processing (i.e. the number of invoices processed without difficulties), supplier delivery reliability and compliance with sustainability standards/ targets.  Strategic supplier relationship measures. These include measures aimed at monitoring the buying company’s position versus its suppliers. Examples are internal customer satisfaction of specific suppliers. Other examples are related to monitoring the quality of relationships with key suppliers. Conducting (bi)annual supplier satisfaction surveys. Scores would include on-time payment, speedy response on supplier requests for information. THANK YOU