Measuring Procurement Performance –Keep it Simple

Why can’t a penny saved be a penny earned?

Procurement and supply chain spending throughout the industry is up by more than 30%, so the profession clearly continues to advance. Yet, has Procurement reached a point where it can be trusted with the task of measuring the value of its own performance? Notwithstanding the need for practical checks and balances, is your procurement organization looking through the lens of its own performance microscope or is it pacing the halls of finance, waiting for validation?

Regardless of department size or the maturity of the procurement discipline, realizing cost savings will always be one of the most important objectives of the procurement function. And as procurement becomes increasingly responsible for non-traditional areas of spend, controlling maverick purchasing behavior and building business cases for product change, its organizational importance will continue to soar. But cost control is a shared responsibility. More than taking steps to learn and appreciate other departments’ frame of reference, at the very least, procurement and finance professionals need to take a deliberate step forward to collaborate and determine ways to objectively measure performance.

It can start by acknowledging that Procurement seeks to demonstrate cost savings in at least three areas:

  • Purchase Demand Management –Reduction in consumption by way of better management of specifications, eliminating redundancies and consolidating requirements. Supply utilization and product standards.
  • Supply Base Management – How do we collaborate with our suppliers to save costs? How do we restructure our supplier relationships to increase competition without damaging the integrity of our partnerships?
  • Total Cost Management – How can Procurement impact organizational behavior in ways that will decrease demand? What programs can be implemented to drive down inventory costs or force the organization through Procurement-led make versus buy decision processes? Are there ways to collaborate with other providers to reduce capital expenditures?

Unfortunately, sinking your teeth into the myriad of legitimate complexities related to measuring a Procurement department’s performance will ultimately yield more questions than answers. But you can’t punt. I can’t help but use the following pro sports analogy: each player’s performance can be measured on film, game to game and in highly objective ways that can be definitively graded. But what if the team keeps losing? That’s not a rhetorical question. What’s your answer? What if the player grades week-to-week with an “A,” but the team is terrible?

Procurement is not an isolated discipline. It is dependent on the level of cooperation it receives from other departments. Like the analogy, it’s a team sport. But there must be a way to measure individual performance. That’s why there must be agreement on the type of savings that can be claimed and why clear, concise frameworks (starting points and end points; from a reported savings to an expense reduction) must be based in sophisticated and comprehensive spend analytics. These tools measure what Procurement professionals can arguably control (i.e. number of suppliers, spend per supplier, spend per cost center/per GL versus historic benchmarks). In this context, linking Procurement performance to the organization’s ultimate grade –care quality/patient outcomes and profitability—can be highly instructive.

—Tom Finn

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