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

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

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

What should be the objectives of Procurement outcome?

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

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

How would you measure cost reductions/savings?

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

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

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

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

How would you measure quality of services?

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

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

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

How would you measure supplier satisfaction?

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

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

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

How would you measure the impact of new initiatives?

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

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

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

How would you measure the health of special interests?

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

What else?

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

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

How would you measure status of internal management?

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

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

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

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

thanK yoU