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

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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

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Janu

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Buyer 2

Buyer 3

Average

Transaction Variance by Buyer

Transaction Variance

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-80

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-20

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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?