Procurement: Use of MetricsLecture #209 February, 2014

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What are the outcome of procurements?

Result Oriented or Process Oriented

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Primary Outcome CategoriesCostQualitySupplier SatisfactionImplementation of new initiativesSpecial interest issues

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What should be the objectives of Procurement outcome?

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Outcome Objectives

Corporate Objective

s

Purchasing

Objectives

Commodity group

A

Commodity group

B

Commodity group

C

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Cost MetricsExpenditures have increasedPrices paidTotal ownership costsVaries across firms; but clearly

oriented towards cost reductions/savings

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How would you measure cost reductions/savings?

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Cost Metrics

Cost Metrics Description

Reduced Cost (via Prices)

Costs relative to previous year

Costs relative to other divisions or units

Costs relative to other regions

Change in cost Vs. Change in market index

Change in firm costs for an individual type of service relative to change in a market cost index for that service

Return on Investment Dollar savings divided by procurement spending

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Calculating Cost Changes Relative to Indices

Market Cost Index Change

Firm Cost Change

Metric “Savings”

Service A %5+ +3% +2%

Service B -5% -8% +3%

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Implementation ConsiderationsBased on comparison of costs

◦Across time◦Divisions◦Regions

For periodic or one-time purchases, data are often insufficient

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Quality MetricsGoods purchases

◦%age of defective productsDifficult concept to measure for

servicesCustomer Satisfaction

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How would you measure quality of services?

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Quality Services Metrics

Quality Metrics Description

Customer satisfaction ratings

Responses from customer satisfaction survey regarding

•Overall satisfaction

•Satisfaction with specific dimensions of performance

Service reliability Frequency of service interruptions

Continuity of services

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Implementation ConsiderationsData needed are generally not captured

by standard internal data systemsDesigning & implementing effective

customer satisfaction surveys is a complex and challenging task

Quality of data depends on:◦Sample Size◦Quality of sample◦Question wording◦Response format◦Timing of survey

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Supplier Satisfaction MetricsEnsure that they buying firm

continues to be able to conduct business with the best suppliers

Forward-looking metric

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How would you measure supplier satisfaction?

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Supplier Satisfaction Metrics

Supplier Satisfaction Metrics

Description

Supplier satisfaction ratings

Responses from supplier satisfaction survey regarding

•Overall satisfaction

•Satisfaction with specific dimensions of interactions

•Satisfaction with different parts of the buying organization

Complaints Supplier-initiated concerns

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Implementation ConsiderationsData collected via surveys

◦In-house surveys◦Third-party surveys ensuring

confidentialitySurveys can be costlyTime-consuming for both buyer

and supplierTo save time & cost, conduct

supplier surveys only annually or biennially

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New Initiatives MetricsInitiatives to improve outcomes of

purchased products/services◦Creating a supply base that is the right

size and composition – Supply base rationalization

Process metric◦Track progress with specific parts of an

implementation planOutcome metric

◦Measure initiative results against pre-specified goals

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How would you measure the impact of new initiatives?

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Initiative Metrics

Example Initiative

Potential Process Metric

Potential Outcome Metric

Supplier base rationalization

Reduction in non-strategic suppliers

Savings

Reductions in sole-source reductions

Responsiveness

Customer Satisfaction

Supplier Development

Number of people involved

Savings

Number of projects Improved performance

Personnel Development

Number of training hours per year, per employee

Mastery of desired skills

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Implementation ConsiderationsDeveloping initiatives,

implementing plans, goals and their associated metrics is a challenging, time – consuming process.

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Special Interest MetricsNot included in other categories

discussed aboveExternal or Internal concerns

◦%age spending directed to small or minority – owned business

◦Frequency/Severity of workplace safety and security incidents

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How would you measure the health of special interests?

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Special Interest Metrics

Special Interest Metrics

Description

Support of small or minority-owned businesses

Dollar spent with these firms

Percentage of expenditures with these firms

Safety & Security Frequency of safety incidents

Frequency of security incidents

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WHAT ELSE?

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Internal Management MetricsMonitor & improve management

of purchasing organizationsComplement the high-level

effectiveness metrics discussed above

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Internal Customer SatisfactionFirm’s business units that utilize

the procurement’s services to buy goods or services they need

Metrics evaluate how well the purchasing organization is meeting the needs of internal customers

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How would you measure status of internal management?

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Internal Management Metrics

Internal Management Metrics

Description

Internal Customer Satisfaction

Dollars spent outside the corporate strategies (maverick buying)

Satisfaction rating based on internal customer surveys

Personnel trainings & retention

Process: Number of training hours per employee per year

Outcome: Mastery of desired skills

Retention of high-quality employees

Ethics violations Number of violations per year

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Implementation ConsiderationsSpecial data collections effortsTracking maverick buying – occur

outside the purchasing organization

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Personnel Training & RetentionPurchasing organization’s current and

future depends on the quality and expertise of its personnel

Conducting analyses to design and then implement optimal purchasing strategies requires sophisticated skills

Track both process and outcome metrics w.r.t. training

Track the retention rate of high-quality personnel

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Ethics ViolationsFirms do track ethics violationsParticularly with respect to

interactions with suppliersSensitive endeavorReports of violations can come

from employees, suppliers and may be offered anonymously

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thanK yoU

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