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Procurement Performance Measurement in 2018

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Organizations today rely on Procurement to drive value beyond unit price savings. For Chief Procurement Officers (CPO), it is challenging to measure the performance of managers who drive these sources of value. Fair and accurate performance measurement is critical for attracting, retaining and promoting top procurement talent. In a typical procurement environment, some categories require larger efforts on cost and risk avoidance, with minor savings achievements, while other categories yield significant savings by nature of the products purchased. For some categories, securing the latest technology to enable top-line growth may far outweigh the importance of purchase price. How can the CPO assess individual category manager performance, each driving unique value, on an even playing field?

Measuring Procurement Effectiveness

In mature procurement organizations, category managers develop value-based category strategies to target underlying metrics, beyond purchase price variance (PPV), based on their unique category and/or portfolio.

Individual performance effectiveness of category managers is then based on their ability to:

  1. Effectively engage with cross-functional business stakeholders
  2. Demonstrate category expertise
  3. Develop and deliver against value-based category strategies

Building a value-based category strategy

Identify Value Drivers

Use of a Category Health Methodology, in which category managers can analyze spend and determine what types of underlying variables (or value drivers), can predict strong business results.

Translate Value Drivers into Specific Business Objectives

Category managers identify value drivers and translate those drivers into specific business objectives.

Based on these value drivers, the category manager outlines the following objectives:

  1. Dual source plastic housings in order to improve supply assurance
  2. Shift product Y to preferred supplier X
  3. Negotiate contracts with supply base in order to map cost to commodity index

Determine a Set of Quantifiable Scorecard Metrics

The final step in the process is to map the objectives to metrics that can be used to assess, and compare, the category manager’s performance against the goals laid out in their category strategy.

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How to Measure Supply Chain Performance

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The appropriate metrics to manage and measure the success of a company’s operation vary significantly by industry, by individual company, and by the scale of the business. What does not vary, however, is the universal need of all companies to employ a well-structured, hierarchical framework to organize and manage their metrics.

The absence of a cohesive framework to house metrics greatly increases the likelihood that a company’s performance measurement system (PMS) will provide inadequate management support, and that resources will be wasted developing duplicative, unaligned and even conflicting metrics.

There are a number of well-known models and frameworks for operations, logistics and supply chain management. Two of the most prominent are the SCOR model and the Balanced Scorecard, and the interested reader is referred to these.

Figure 1 depicts an integrated hierarchical supply chain performance measurement system. The framework contains three levels (the strategic, tactical and operational), and within each level, it has both external and internal measures. In this PMS framework, it is the scale of an operation or activity that a particular metric monitors which determines its place in the hierarchy.

Figure 2 provides additional insight on how this hierarchical PMS framework works, displaying sample external and internal metrics for a distribution organization at each level of the hierarchy. The external metrics measure outputs and/or services that flow across the supply chain and evaluate some aspect of serving the customer. The internal metrics have an “inward” focus; and as shown in Figure 2, they evaluate how efficiently the overall distribution organization and each of its sub-functions operates.

Read more at How to Measure Supply Chain Performance

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