Performance Measurement and Evaluation Chapter 19 CENGAGE LEARNING Monczka – Handfield – Giunipero – Patterson

Purchasing & Supply Chain Management, 4e Chapter Overview Purchasing and supply chain performance measurement and evaluation Purchasing and supply chain performance measurement categories Developing a performance measurement and evaluation system Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e Chapter Overview Performance benchmarking: comparing against the best A summary of purchasing measurement and evaluation characteristics Purchasing & Supply Chain Management, 4e

Performance Measurement Effectiveness – the extent to which, by choosing a certain course of action, management can meet a previously established goal or standard Efficiency – the relationship between planned and actual sacrifices made to realize a previously established goal or standard Purchasing & Supply Chain Management, 4e

Why Measure Performance? Support better decision making Support better communication Provide performance feedback Motivate and direct behavior Purchasing & Supply Chain Management, 4e

Problems with Measurement Too much data and wrong data Measures that are short-term focused Lack of detail Drive the wrong performance Measures of behavior vs. accomplishments Purchasing & Supply Chain Management, 4e

Integration Elements

Price Performance Measures How effectively purchasing dollars are spent Actual price compared to plan Actual prices to market index Price comparisons between operations Target prices achieved Purchasing & Supply Chain Management, 4e

Actual Prices Compared to Plan On a total aggregated basis Commodity or product family Individual item Project Buying location or department Buyer Management group Supplier Purchasing & Supply Chain Management, 4e

Actual Prices Compared to Plan Purchase price variance = Actual price – Planned price Purchase price variance % = Actual price / Planned price Total purchase price variance = (Actual price – Planned price) x Purchase quantity (or volume) Current year $ impact of variance = (Actual price – Planned price) x (est. volume x % of requirements left) Units of measure can be either $ or % Purchasing & Supply Chain Management, 4e

Actual Prices to Market Index Market-based index for Item X March 31, 2007 = 125 1b June 30, 2007 128 1c Market index change (128 – 125) / 125 2.4% increase 2a Actual price paid for Item X $150.00 2b $152.00 2c Price paid change rate ($152 - $150) / $150 1.3% increase 3 Comparison to market 2.4% - 1.3% Better by 1.1% Purchasing & Supply Chain Management, 4e

Target Prices Achieved Target price – Profit target = Allowable cost Purchasing & Supply Chain Management, 4e

Cost Effectiveness Measures Cost changes Tangible cost reduction achieved from a change in sourcing strategy Cost avoidance Price increase that would have occurred without a specific purchasing effort or action Require manual calculation Can be subject to interpretation Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e Revenue Measures Royalties generated from supplier- or buyer-developed technology and patents driven by purchasing Supplier contribution as a reason for new business Return on licensing technology driven by purchasing Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e Revenue Measures Number of patents that have lead to royalties Number of invention disclosure forms files Number of patents granted Value of free samples from suppliers Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e Quality Measures Parts per million Customer defects per supplier Field failure rates by purchase item Field failure rates by supplier Purchasing & Supply Chain Management, 4e

Time/Delivery/Responsiveness Time-to-market targets – new product and services On time delivery/responsiveness Achieving new product introduction ramp up schedules and introduction dates Purchasing & Supply Chain Management, 4e

Time/Delivery/Responsiveness Cycle time reductions: order entry, manufacturing/operations, distribution, and logistics Responsiveness to schedule changes, mix changes, and design or service changes Purchasing & Supply Chain Management, 4e

Technology/Innovation Measures First insight/production outputs of new supplier technology Standardization and use of industry standards Purchasing & Supply Chain Management, 4e

Asset and Integrated SCM Measures Asset-related (inventory) Transportation cost reduction Customer orders E-transactions (# and % of suppliers/ dollars/orders) Pull systems/shared schedules/ supplier-managed inventory (SMI) Purchasing & Supply Chain Management, 4e

Administration Measures Current budget plus adjustment Control ratios Other approaches Purchasing workload in/out Line items processed Headcount Purchasing & Supply Chain Management, 4e

Government/Social Measures Minority, women, and small business enterprise objectives Percentage of spend to total spend Number of suppliers in each category Growth of minority, women, and small business enterprise spend Purchasing & Supply Chain Management, 4e

Other Categories of Measures Internal customer satisfaction measures Supplier performance measures Strategic performance measures Purchasing & Supply Chain Management, 4e

Typical Strategic Measures Proportion of quality-certified suppliers to total suppliers Total number of suppliers Supplier lead times indicators % of purchase dollars committed to long-term contracts Supplier development costs and benefits Purchasing & Supply Chain Management, 4e

Developing a Measurement System Determine which performance categories to measure Develop specific performance measures Establish performance objectives for each measure Finalize system details Implement and review system Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e Specific Measures Clarity Use of accurate and available data Creativity Directly related to organizational objectives Joint participation Dynamic over time Not subject to manipulation Purchasing & Supply Chain Management, 4e

Performance Objectives for Each Historical data Internal comparison External analysis Purchasing & Supply Chain Management, 4e

Finalize System Details Performance-reporting frequency Education and training Using system output Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e Benchmarking Defined The continuous measuring of products, services, processes, activities, and practices against a firm’s best competitors or those companies recognized as industry of functional leaders Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e Types of Benchmarking Strategic benchmarking Operational benchmarking Support activity benchmarking Purchasing & Supply Chain Management, 4e

Benefits of Benchmarking Helps identify the best business or functional practices Breaks down a reluctance to change Serves as a source of market intelligence Creates valuable professional contacts between firms Purchasing & Supply Chain Management, 4e

Critical Success Factors Must become an accepted process Must be a permanent part of a system that establishes goals, objectives, and competitive strategies Must be willing to commit necessary legwork toward data gathering Detailed and accurate benchmarking data Purchasing & Supply Chain Management, 4e

Information and Data Sources Trade journals Internet Direct contact Suppliers Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e Benchmarking Process Planning Analysis Integration Action Maturity Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e Balanced Scorecard Goes beyond financial measures which are lagging indicators How do customers see us? (customer) What must we excel at? (operational) Can we continue to improve and create value? (innovation) How do we look to shareholders? (financial) Purchasing & Supply Chain Management, 4e

Measurement System Characteristics Measurement is not free Not all aspects of performance lend themselves to quantitative measurement Purchasing is better served by a few precisely defined and thoroughly understood measures Purchasing & Supply Chain Management, 4e

Measurement System Characteristics Effective measurement requires a consistent and reliable database Periodic review of the measurement system to: Eliminate unimportant or unnecessary measures Add new measures as required Reevaluate objectives or targets Purchasing & Supply Chain Management, 4e

Measurement System Characteristics There is no best way to measure performance Measurement reporting requirements and content vary by position and level within the organization A single, overall productivity measure is not feasible Purchasing & Supply Chain Management, 4e

Measurement System Characteristics Many industries need to shift from operational measures to strategic measures Strategies and plans used to product a measure’s result are probably more important than the end result itself A balanced scorecard approach is highly effective Purchasing & Supply Chain Management, 4e

Human Resource Characteristics A measurement and evaluation system is not a substitute for effective management An effective system requires communication Measures must reinforce positive behavior, be linked to the reward system, and not used punitively Purchasing & Supply Chain Management, 4e