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

2. 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

3. 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

4. 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

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

6. 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

7. Integration Elements

8. 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

9. 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

10. 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

11. 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

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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

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

20. 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

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

22. 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

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

24. 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

25. 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

26. 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

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

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

29. 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

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

31. 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

32. 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

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

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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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