purchasing performance measures by steve lunden, m.b.a., cpsm, c.p.m. director of university...
TRANSCRIPT
Purchasing Performance Measures
BySteve Lunden, M.B.A., CPSM, C.P.M.
Director of University PurchasingGonzaga University
Measuring the performance of any purchasing department has always been a difficult task.
“If you can’t measure it, you can’t manage it.”
Is there an optimal set of metrics or measures?
Today’s Objectives
Look at Purchasing Performance Measures from the perspective of:
1. Department level– How are the individual members doing?
2. Company level– How is the department doing?
Whether public or private consider:
• What are your business objectives? – Use these organizational objectives to
determine the measurements needed.
• Search for measures that match with the goals. – Linkage must be established between
objectives and measures.
First Considerations:
First Considerations: (cont.)
• Stakeholders must be involved in the determination of the measures.
• Senior management, the chief purchasing officer’s (CPO’s) superior, and major internal customers must be involved.
First Considerations: (cont.)
• Don’t over or under measure. Find the “right” balance.
• Needs for measures will change. Today’s measures will differ from what will be needed tomorrow.
Why measure?
• To determine how the Purchasing Department is doing
• To quantify cost reductions or avoidance that allow us to be more competitive
• To determine how individual buyers are doing• To evaluate the fairness of buyer “loadings”• To assess the effectiveness of any changes• To argue for more of the scarce financial assets
What to measure?
• Purchasing is like the black box.
• Purchase requisitions (inputs) go into one side of the box.
• Purchasing magic happens.
• Goods and services (outputs) come out of the other side.
?INPU
T
INPU
T
OUTPUTOUTPUT
Black Box of Purchasing
What to measure?
• Purchasing efficiency– Performance against administrative budget
• Purchasing effectiveness– Inventory turnover ratios– Seasonal requirements may complicate
• Purchasing Functionality– Right item at the right time at right cost
Inputs
• Purchase requests
• Change requests
• Research
• Stores/inventory requests
• Bids
• Special projects
• Other specific activities
Outputs
• Goods
• Services
• Purchase Orders
• Change Orders
• Blanket Purchase Orders
• Contract Purchase Orders
• Authorization for payment
What to measure
• Dollars
• Effort
Measure the Inputs
How many or how much?
• Purchase requests• Change requests• Research• Stores/inventory
requests
• Bids• Special projects• Other specific
activities• Difficulty rating
Measure the Outputs
How many or how much?• Goods • Services• Purchase Orders• Change Orders• Authorizations for
payment
• Purchasing card use• Recharges• Releases• New agreements• Difficulty rating
How to measure
• Gather the data (monthly)– Manual– MIS
• Caution!!!
“What get measured, gets done.”
What to measure• Dollars / Financial
– ROI = Return / Investment– ROA = Return / Assets employed
• Increased Quality– Production or waste savings
• Purchasing process improvements– EDI, E-procurement systems, vendor
managed inventory & pay on receipt • Transportation improvements
What to measure (cont.)
• Spend
Annual spend
Monthly spend• Savings
Documented savings (hard numbers)
Cost avoidance savings (soft numbers)
What to measure (cont.)
• Cost savings
• Vendor quality
• Delivery metrics
• Price effectiveness
• Inventory flow
What to measure (cont.)
Effort• Transactions
Number of PONumber of line items
• Service measuresTurnaround timePercent on time
• Accuracy measuresRate of returns
PurchasingMaterials costs/
prices
Product / quality
Purchasing logistics
Purchasingorganization
Purchasingeffectiveness
Purchasingefficiency
Purc
hasi
ng
perf
orm
ance
Materials price/cost control
Purchasing’s involvement in new Product development
Purchasing and Total Quality control
Adequate requisitioning
Order and inventory policy
Supplier delivery reliability
Personnel
Management
Procedures & policies
Information system
Materials price/cost reduction
Key areas of purchasing performance measurement
Suggested Measures
• Total annual spend
• Total number of suppliers
• Annual spend by commodity
• Cost savings per procurement investment
• Cost per purchase order
• PO per FTE
• Line items per FTE
Suggested Measures (cont.)
• Error rate
• Procure to pay cycle time
• Diversity initiative success
• Percent of defective items by supplier
• Back order ratio by supplier
• On time receiving rate
Suggested Measures (cont.)
• Return rate (returns / total line items)
• Cycle time
• Purchase price variance
Target price – Actual cost
• Purchase order variance
Original price – Actual cost
What to do with the measures?
• Make graphs and charts
• Why? – Because Management loves charts and
graphs.– Easy method to show activity– Allows historical comparisons
What to do with the measures? (cont.)
• Look for trends
• Present to management
• Use consistency
• Compare over time
• Compare to historical– Month to month– Year to year– Average to average
What to do with the measures? (cont.)
• Argue for more of the scarce assets DollarsPeopleTechnology
• Argue for ControlCentralization or decentralization
More / less• Distributed access (Purchasing cards)
Individual Loadings
• This is the sum of inputs and outputs of an individual buyer.
• We are attempting to quantify “How busy” an individual buyer” is comparison purposes.
• The “difficulty factor” is very subjective.
Departmental Transaction Loading Totals
0
5000
10000
15000
20000
25000
Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 Period 7 Period 8
Total Transactions
Monthly Loading by Buyer
Buyer Loadings
0
100
200
300
400
500
600
Janu
ary
Febru
ary
Mar
chApr
ilM
ayJu
ne July
Augus
t
Septe
mbe
r
Octobe
r
Novem
ber
Decem
ber
Tra
nsa
ctio
ns Buyer 1
Buyer 2
Buyer 3
Average
Transaction Variance by Buyer
Transaction Variance
-100
-80
-60
-40
-20
0
20
40
60
80
100
Janu
ary
Febru
ary
Mar
chApr
ilM
ayJu
ne July
Augus
t
Septe
mbe
r
Octobe
r
Novem
ber
Decem
ber
Var
ian
ce Buyer 1
Buyer 2
Buyer 3
Public Sector Nuances to Performance Measures
• How can the School District determine if our Purchasing Department is an added value to the District?
Who gets to Vote on our Worth?(Stakeholders)
• Internal Customers:
School District Board of Directors
Superintendent’s Cabinet
Budgetary Authorities
Accounting Department Partners
Ultimately the teachers & students
Indicators of Our Added Value to Internal Customers
• Compliance with Applicable Statutes
• Needed Product/Service received on time and at right (best) price
• Clean Audits
• High Level of Customer Service
(Personal Buyer Model for big spending deptarments)
Who else gets to Vote on our Worth?
• External Customers
Vendors
SW/PW Contractors
Personal Service Providers (using SS#)
Community Collaborative Partners
Performance Measures for External Customers
• Are we Fair?
• Well written Solicitations, Contracts and Agreements
• Good overall Communications & Relationships
• Good Problem Resolution Skills
Department Level Strategy
• Reliable
• Competent & Knowledgeable
• Timely
• Helpful
• Friendly
• Proactive
Staff Level Strategy
• Hire good people
• Provide regular & relevant staff training
• Cross train staff (generic job descriptions)
• Match assignments to individual’s interests, experience and aptitude
• Act as a personal buyer in a way that elicits trust, successful outcomes and develops enjoyable working relationships
Staff Level Strategy (Continued)
• Re-allocate work load periodically to:
* Keep work fresh and challenging,
* Allows for cross-training,
* Encourage individuals to explore & grow in various procurement specialties
Staff Level Strategy (Continued)
• Stress Team!*Help out when someone’s overwhelmed
*Sub for the absent as needed
*Challenge each other on public purchasing law, principals, ethics, etc. when opportunities arise
*Celebrate together when you can (birthdays, seasons, significant events) and always with food
Helpful Measures of Success
• Built in Accountability to each Transaction
• Weekly briefings reveal buyer productivity, timeliness, attention to detail, competence
• Director receives feedback from external & internal customers
• Budget Time – is our department asked to cut positions in tough economic times?
• Has department grown in scope & duties?
Questions?