1. 9/21/2015Managing Purchasing Performance1 2. Performance Management & Metrics Dr Margaret Farrell margaret.farrell@dit.iemargaret.farrell@dit.ie Instructor: Dr. Nabil El-sakka (PUA University) Nabil.abmed@pua.edu.eg

2. 9/21/2015 Managing Purchasing Performance 2 2 Reduce indirect expenses by 10-20% Newly defined purchasing organization, with upgraded capabilities Sustainable savings and a culture of continuous improvement Objectives Clear decision-making roles/ responsibilities Consistent supplier governance and management models Processes codified, embedded in the business, and supported by e-procurement systems and tools Processes and decision rights Purchasing aligned with businesses and global supply markets — Right balance of center and in-region Strategic and tactical purchasing decisions properly separated Capabilities of core and adjunct team upgraded Organization and people Expense fact base in place, opportunities identified and prioritized: − Spend analytics − Supplier analytics Progress tracking against key priorities tracked Enhanced transparency thru’ management dashboards Performance tracking Building Sustainable Capabilities Category playbooks to facilitate global rollout Documented processes for subsequent use Strengthening internal expertise COEs for specific category areas Repeatable model

3. 9/21/2015Managing Purchasing Performance3 2. Performance Measurement and Management

4. 9/21/2015 Managing Purchasing Performance 4 Evaluating purchasing performance Philosophy of evaluation Why evaluate?  Managers need a variety of measures for purchasing performance Effectiveness ‘is the extent to which managers make decisions that move them towards a previously established goal’ Efficiency ‘ measures how well the goal is reached, what resources are used to reach the goal or what sacrifices are necessary to reach the goal’ Elements of evaluation 4 Functional reviews (5 years) 4 Policy and procedure audits (annually) 4 Day-to-day performance measurement and evaluation

5. 9/21/2015 Managing Purchasing Performance 5 Why Measure performance 1. Support better decision making. Over time it tracks performance 2. Support better Communication across the supply chain 3. Improved visibility Provide performance feedback; buyer, department, team & supplier 4. Better motivation Motivate and direct behaviour towards desired results

6. 9/21/2015 Managing Purchasing Performance 6 Do you agree?

7. 9/21/2015 Managing Purchasing Performance 7 Purchasing functional reviews Situational analysis, supported by senior management 3 Where are we today? 3 Where do we want to be tomorrow 3 Are the structure, policy and people available to achieve our objectives?

8. 9/21/2015 Managing Purchasing Performance 8 Purchasing performance measurement 3 Supplier quality and delivery 3 Price competitiveness 3 Profit improvements 3 Inventory 3 Transportation costs 3 New product and process improvements 3 Administration and control 3 Work load efficiency 3 Environmental – Societal - Regulatory 3 Continuity of supply and material flow

9. 9/21/2015 Managing Purchasing Performance 9 Problems with Measuring Performance Lack of definition Lack of formal objectives and performance standards Problems in accurate measurement The wrong measures or Incorrect data Too much data Short term focussed Lack of detail Different purchasing scope Drives the wrong performance Measures of behaviour versus accomplishments  No. of contracts versus value saved by the contracts  No. of team meeting versus the results achieved by the teams actions

10. 9/21/2015 Managing Purchasing Performance 10

11. 9/21/2015 Managing Purchasing Performance 11 Key areas of purchasing performance measurement Purchasing effectiveness purchasing materials costs & prices  Mats price/cost control  mats price/cost reduction Product/ Quality  P.’s involvement in new product development  Purchasing & TQ control Purchasing Logistics  adequate requisitioning  order & inventory policy  Supplier delivery reliability Purchasing efficiency Purchasing organisations  Personnel  Management  Procedures and policies  Information Systems 1. what have we learnt to date about inventory management 2. What role does inventory play in the supply chain 3. Give some Egyptian examples 4. Weighted point plan & an example

12. 9/21/2015 Managing Purchasing Performance 12 a. Strategic Plan/ Vision/ Goals b. Procurement & supply plan/ Vision & goals c. Commodity team Plans & goals d. Measures e. Company contribution f. Competitive Advantage Top-down & Bottom up targets Price/ Cost Quality Time/ Delivery Responsiveness Technology & Innovation Environment & Safety Asset Management Integrated Supply Chain Efficiency Government/ Societal Internal Customer satisfaction Monczka, Handfield, Giunipero, Patterson & Waters (2010)

13. 9/21/2015 Managing Purchasing Performance 13 Price Performance Measures (Monczka, Handfield, Giunipero, Patterson & Waters, 2010) Purchase Price Variance Actual price compared with plan Purchase Price Variance ((PPV) = Actual Price – Planned Price Percentage PPV = Actual Price / Planned Price Total PPV = (Actual Price – Planned Price) x quantity Current year impact of PPV = (AP – PP) x (estimated annual volume x % of requirements remaining) Actual price compared with market index (see next slide) Price comparisons between operations (depts within public sector) Target Prices Achieved Target Price – Profit Target = Allowable purchase cost

14. 9/21/2015 Managing Purchasing Performance 14 Price Performance Measures (Monczka, Handfield, Giunipero, Patterson & Waters, 2010) In the months from March to June price paid for a widget rises from €150 to €152. the government price index rises from 125 to 128. Has the NPS done a good job? Government Price Index 31 st March, market based price index for item = 125 30 th June, market based price index for item = 128  Market Index Change = (128-125)/125 = 2.4% increase Price Paid 31 st March actual Price paid = €150 30 th June actual price paid = €152  Price change (152-150)/ 150 = 1.3% increase Comparison of actual to market: 2.4 – 1.3 better by 1.1%

15. 9/21/2015 Managing Purchasing Performance 15 Cost Effectiveness Measures Cost Changes  Cost reduction =(New price–Old price) x est. vol. Cost Avoidance  ‘Represents the difference between a price paid and a higher price that might have occurred if purchasing had not taken some special action to get the lower price REM  The process used to achieve the cost reduction will generally have long term consequences  Buyer – Supplier Relationships

16. 9/21/2015 Managing Purchasing Performance 16 Revenue Measures Royalties generated thro’ acquiring new technology/ patents Supplier contribution – business development plans. P finds suppliers with unique technology, or better processes Value of free samples from suppliers Return from licensing/ patents driven by procurement Quality Measures Defects per million  Tighter tolerances Defects per supplier  Comparative quality  Absolute targets Field Failure Rates by purchase item and by supplier  A measure of (raw material) items – failure after sales

17. 9/21/2015 Managing Purchasing Performance 17 Time and Responsiveness Measures Time to market for New Products or Services On time Delivery  Due dates, scheduled or promised  Time slots  Acceptable range Achieving production Schedule Cycle time Responsiveness Technology or Innovation Measures First View of new technology from Suppliers Standardisation and use of industry standards

18. 9/21/2015 Managing Purchasing Performance 18 Asset Management & Integrated SC Measures Inventory Costs  Value of Inventory Investment  Total number of items stored  Stock turnover  Time covered by remaining stock  Inventory carrying cost  Amount of safety stock held  Proportion of inactive items  Accuracy of inventory management system records Transport Costs Customer Orders E-transactions  Absolute number of suppliers using e- procurement  % of suppliers using e-proc  Value & % of orders  % of shipping notices  Funds transferred by EFT  Meeting customer requirements  Inventory within the supply chain

19. 9/21/2015 Managing Purchasing Performance 19 Government and Social Measures Proportion of spend delivered by certain types of measures Number of suppliers from a certain type of enterprise Growth of spending in certain types of enterprises Administration & Efficiency Measures Current Budget plus adjustment Control Ratios