1. Procurement: Use of Metrics
Lecture #2
08 February, 2014

3. What are the outcome of procurements?
Result Oriented or Process Oriented
What are the outcome of procurements?

4. Primary Outcome Categories
Cost
Quality
Supplier Satisfaction
Implementation of new initiatives
Special interest issues

5. What should be the objectives of Procurement outcome?

6. Purchasing Objectives
Outcome Objectives
Corporate Objectives
Purchasing Objectives
Commodity group A
Commodity group B
Commodity group C

7. Cost Metrics Expenditures have increased Prices paid
Total ownership costs
Varies across firms; but clearly oriented towards cost reductions/savings

8. How would you measure cost reductions/savings?

9. 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

10. Calculating Cost Changes Relative to Indices
Market Cost Index Change
Firm Cost Change
Metric “Savings”
Service A
%5+
+3%
+2%
Service B
-5%
-8%

11. Implementation Considerations
Based on comparison of costs
Across time
Divisions
Regions
For periodic or one-time purchases, data are often insufficient

12. Quality Metrics Goods purchases
%age of defective products
Difficult concept to measure for services
Customer Satisfaction

13. How would you measure quality of services?

14. 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

15. Implementation Considerations
Data needed are generally not captured by standard internal data systems
Designing & 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

16. Supplier Satisfaction Metrics
Ensure that they buying firm continues to be able to conduct business with the best suppliers
Forward-looking metric

17. How would you measure supplier satisfaction?

18. 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

19. Implementation Considerations
Data collected via surveys
In-house surveys
Third-party surveys ensuring confidentiality
Surveys can be costly
Time-consuming for both buyer and supplier
To save time & cost, conduct supplier surveys only annually or biennially

20. New Initiatives Metrics
Initiatives 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 plan
Outcome metric
Measure initiative results against pre-specified goals

21. How would you measure the impact of new initiatives?

22. 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
Number of projects
Improved performance
Personnel Development
Number of training hours per year, per employee
Mastery of desired skills

23. Implementation Considerations
Developing initiatives, implementing plans, goals and their associated metrics is a challenging, time – consuming process.

24. Special Interest Metrics
Not included in other categories discussed above
External or Internal concerns
%age spending directed to small or minority – owned business
Frequency/Severity of workplace safety and security incidents

25. How would you measure the health of special interests?

26. 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

27. What else?

28. Internal Management Metrics
Monitor & improve management of purchasing organizations
Complement the high-level effectiveness metrics discussed above

29. Internal Customer Satisfaction
Firm’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

30. How would you measure status of internal management?

31. 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

32. Implementation Considerations
Special data collections efforts
Tracking maverick buying – occur outside the purchasing organization

33. Personnel Training & Retention
Purchasing 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

34. Ethics Violations Firms do track ethics violations
Particularly with respect to interactions with suppliers
Sensitive endeavor
Reports of violations can come from employees, suppliers and may be offered anonymously

36. thanK yoU