Consultancy Negotiation Skills Development Recruitment Interim Management Asia Sourcing
© PMMS Consulting Group 2008 All Rights Reserved
How to Effectively Measure a Procurement Organization
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Contact Details
• Contact us for more information
Julie Brignac, Principal+1 305 890 9078
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+44 (0)1403 249600
Course Overview
• Why is measuring Procurement important?
• You can’t improve what you can’t measure– But most organizations think they are “too busy” to
implement sustainable metrics – and live by them
• You will learn in this course how to– Recognize which metrics are best to implement,
depending on the Procurement organizational structure– Develop sustainable metrics that leadership will notice
and respect
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• Identify successful, foundational key measures for varying Procurement organizational structures
• Develop effective measurements for any type of Procurement function
• Articulate how to strategically manage the organization to positively affect these measures
• Define the metrics that each Procurement practitioner should have to evaluate their performance
• Explain the most effective reporting venues
Course Objectives
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Building a Measurement SystemHow do you identify which metrics will work best?
Top 3 indicators to a successful measurement
system
Questions to ask
1) Understand who and how purchasing happens in the organization/company
Is it centralized or decentralized?
2) Review the company’s strategic business objectives
Which ones are linked to Procurement?
3) Determine the priorities for Procurement
Cost savingsInventory
managementeProcurement
solutions5
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Top 3 IndicatorsBuilding a Measurement System
1) Who is doing the purchasing?
a) Build a process map to find out
Example: Purchasing capital equipment designed by a company’s internal engineering department.
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Purchase Capital Equipment
Pu
rch
asi
ng
En
gin
ee
rin
g
Designs new equipment
Locates potential suppliers
Documents equipment
specifications
Are selected suppliers qualified?
Issue RFQ to suppliers
Evaluate bid responses
Input to RFQ scope of work
Negotiate pricing for equipment
Purchase equipment
Yes
No
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Organizational Examples
Centralized Procurement Decentralized Procurement
Purchasingactivities
Purchasingactivities
Oth
er
fun
ctio
ns
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Key Foundational MetricsRegardless of Organization
Key Metrics Sub-Metric Examples
Supply Base Statistics Number of suppliers – active and inactive (need to define)
Proportion of items under contract
Productivity/Cost Savings Price per annum comparison
Cost per Purchase Order Number of POs issued
Total Cost per PO
Segregation of Duties Authority limits and proper processes established for requisitions, purchase orders, invoice payments
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Centralized ModelThe Most Effective Metrics
• Supply Base Statistics– Number of active and inactive suppliers– Number of strategic suppliers
• Secured via contract
– Compliance• Number of purchase orders placed with strategic
suppliers
• Productivity/Cost Savings– Year over year (YOY) price paid per unit comparison– Inventory levels
• Total inventory reduction – YOY $• Inventory levels ($) by strategic supplier
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Decentralized ModelThe Most Effective Metrics
• Supply Base Statistics– Number of active and inactive suppliers– Number of purchase orders placed with each supplier
• To evaluate opportunity for leveraged buys
• Cost per Purchase Order
• Compliance– Number of employees issuing purchase orders– Volume ($) of purchases issued without purchase
orders
Productivity difficult to measure in this scenario due to variation of purchasing methods and venues10
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Key Metric DefinitionsProductivity
1. Tangible Savings (Cash)
2. Intangible Savings (Redistributed and Infrastructure Costs)
3. Cost Avoidance
4. Value of Lost, Obsolete and Redundant Supplies
1. Annualized purchase price savings, fully realized, operating cost savings and value-adds that result in bottom-line contribution
2. Reductions in infrastructure requirements and/or operating costs for supply chain (facilities, people, equipment, etc.) that are not seen in the organization’s bottom line
3. Price increases, deterioration of services and other hidden costs that were avoided through supply chain
4. The value of supplies lost, damaged, sold (lost asset value on disposal) or time expired
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Effective Reporting Venues
Reporting Alignment
Business Financial Statements
Functional Procurement
Balanced Scorecard
Individual Procurement Practitioner
Reports reviewed by functional
leader
Reports reviewed by business leadership
Reports reviewed by senior
leadership and CEO
Reports reviewed by board of
directors and shareholders
All metrics are aligned
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