Stop living in the last century! Reporting year-over-year purchasing cost savings and improved administrative activities is a valueless exercise. How does an increase in the number of requisitions a junior buyer processes help gain strategic advantage? How does soft savings cost avoidance reconcile with limits to supply sustainability and overall cost increases year over year? Unless Supply Management contributions and savings can be expressed in value to the company’s overall strategic objectives, they lack creditability with senior management.
There are only five critical measurements of the effective contribution from Supply Management—both the internal procurement and supply organization and the external suppliers. They are:
How well does Supply Management provide the desired materials (services) within the desired time frame?
The most important measure is whether the supplier delivered the required materials or services on time. On-time delivery forms the basis of trust and confidence, not only between the supplier and buyer, but also—critically—between the buyer and the buyer’s internal customer.
- How well does Supply Management provide cost-effective materials and services?
Supplier savings should be measured on a “market basket” approach to identify the total impact of competitive pricing. The basket consists of the top 20 to 25 purchase commodities that collectively account for in excess of 80 percent of the total annual spend. The targeted range for the market basket is developed jointly with procurement, finance, and manufacturing. The target range represents historical projections and engineered or benchmarked goals that take into consideration the estimated total usage.
- How well does Supply Management accurately forecast requirements and measure/monitor inventory and other assets?
All inventory starts as a purchase! The challenge with inventory is to measure both the absolute change and the relative improvement against ever-tightening targets. The emphasis is on finding systemic causes of problems—not just to correct mismatches. No system can operate without inventory accuracy.
- How well does Supply Management know and fulfill changing stakeholder satisfiers?
Meeting stakeholders’ expectations is a dynamic, not static, environment. Expectations do and must change as the challenges and priorities change. It is our responsibility to formalize the measurement process to identify those significant and changing customer requirements; that requires a continuum of communications between Supply Management (internal and external) and the stakeholder. Supply Management should be the facilitator of that communication, not the gatekeeper.
- How well does Supply Management achieve operational efficiencies through cycle time reductions in processes, organization, and resources?
The basic lessons learned from JIT and quality control initiatives are that reductions in process cycle time expose problems, improve resource management, and reduce overall costs. The supplier must be a critical part of the effort to reduce cycle time. In many cases, the longest cycle time is that of the administrative process for acquisition and the lead times for delivery. Supply Management should still initiate measurable programs in process time reductions, material delivery times, and acquisition cycle time frames.
Track and Report Progress with a Balanced Scorecard—Spider Diagrams
A balanced scorecard groups the critical measures that contribute to stated objectives. It is a visual display of how well Supply Management is meeting its contribution. For example:
The process of Supply Management measurement has two basic tenets: it should measure both quantitative and qualitative performance, and it should be an ongoing measurement identifying trends and change requirements. Procurement and the internal users are both customers of the suppliers. Supply Management has changed. It is no longer a functional issue but a strategic management issue. As such, the measurement of Supply Management’s effectiveness and contribution must change and reflect its strategic role.