Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. So far, in our review, we’ve covered the Purchasing Professional’s 10 Commandments, organizational role, Supply Management strategy, talent, social responsibility, strategic sourcing, supplier qualification, negotiation, and supplier relationship management. This post, which continues our review of Part III, dives into procurement performance — measurement and methodology.

If you do not have a solid way of measuring procurement performance, you do not know how well you are doing or, more importantly, how you can improve. If you don’t measure performance, you can be guaranteed that performance, inside and outside your organization, will not be what you expect, and possibly not even to the minimum levels that you contracted for! You’ll have no way of knowing if your supplier understands your expectations, cares, or if your buyers are keeping up their end of the bargain (and buying on contract).

As a result you should keep a scorecard that addresses, at a minimum, the six classifications of procurement impact identified by the authors:

1. True Expense Reduction / Cost Savings
   When you obtain a true cost reduction and hold volume requirements steady, this is a huge win that is easily understood by all.
2. Price Reductions that Offset Volume Increases
   If volume requirements increase 20%, chances are total spend is going to go up, but if you negotiated good price reductions, the organization is still saving on a unit basis and the organization must get credit for this.
3. Expense Reductions through Negotiation
   If the organization did not buy a product or service under contract in the past, but started buying such product or service under contract, then any cost reduction against average historical unit pricing is a savings. If the organization did not previously buy the product or service, then any cost reduction against a market average is a saving (as that is what the organization would be likely to pay, at a minimum, without Procurement’s involvement).
4. Volatile Commodity Price Reductions Against Market(-Based) Pricing
   There are some commodities, such as crude oil (where the price is essentially set by Wall Street, as we explained in a recent post here on SI), where it is virtually impossible for an average Procurement Pro to reduce cost. Markets drive the prices, and there’s little a Procurement Pro can do. But if the average year-over-year increase is 25%, and the Procurement Pro manages to keep the year-over-year increase to 20%, that’s a win.
5. Savings that could be obtained with Procurement Involvement
   If Procurement saved 1 Million on 10 Million of spend, that might not be much to an organization that spends 50 Million, but if Procurement was instead allowed to manage 80% of the organization’s spend instead of 20%, then, instead of reducing top-line costs by 2%, it could reduce top-line costs by 8%, and that is a significant contribution that will carry straight to the bottom line [(c) Robert Rudzki]! And if Procurement identifies any areas where it can exceed the average organizational savings percentage, they should be clearly communicated.
6. Price Increases Incurred
   If Procurement only reports the good, and hides the bad (which will happen from time to time as that Black Swan, who makes Hannibal look like a juvie in comparison, is one nasty little bugger), then it is risking having its reputation ruined when someone in the finance office, bitter about the recognition Procurement is receiving, digs where you don’t want him too. Report the bad. If Procurement is doing its job well, this number is going to be dwarfed by the other numbers and the total-savings-across-the-board calculation is still going to make Procurement look like a star.

The chapter does a great job of identifying, and explaining, the appropriate cost savings formulae you will need to report the above; explaining what a financial performance analysis is; and explaining some key financial terms (such as EPS, EBITDA, and ROI); but the only other section I wish to point out is the section on measuring total team performance that outlines some common mistakes that should be avoided in your reporting:

• Cost Savings as the Lone Metric
  The first reaction of a skeptic will be what are you trying to hide? As every organization contains a number of skeptics, don’t do this.
• Not Using Net Cost Savings as Metric
  It’s not how much you negotiate, but how much you capture. That’s why SRM/SPM and spend monitoring (as described in the 100%-free no-registration-required eBook on Spend Visibility: An Implementation Guide) is so vital!
• Not Taking Markets into Account When Setting Goals
  If raw material costs for steel went up 30% and your product is 60% steel, then your raw product costs have shot up 18% and a 10% year-over-year cost reduction ain’t gonna happen. Don’t expect it!

Remember, it’s all about cost savings credibility. If you have it, your Supply Management organization will get the respect it deserves!

The US Post Office is in dire straits. So dire that, as per the transcript of this PBS.org Newsmaker Interview from December 5, 2011, on how the “U.S. Postal Service Faces Big Changes Amid [its] Struggle to Deliver on Profitability”, the post office is planning to shutter almost half of the nation’s mail processing centres next spring. Given that it is currently 15 Billion in debt and owes about 5 Billion for retiree health benefits, it needs to save 20 Billion fast and it’s solution is a significant restructuring that it hopes will allow it to save 2 Billion next year and 20 Billion by 2015.

This is pretty drastic, and we’ll talk more about it in a bit, but it’s also surprising given that it’s counterpart across the pond, Royal Mail, at the same time, was discussing the results of its first major Procurement Transformation in “Special Delivery”, which ended in 2009 and saved 300 Million pounds. This was followed by a cost management program that doubled the savings number about a year later, which led into a second major transformation project, currently underway, where Royal Mail expects to save significant dollars yet again. 600 Million pounds, or roughly 1 Billion dollars, is very significant when you consider that the Procurement organization only influences about 1.7 Billion pounds of spend out of the 2.3 Billion pounds spend by Royal Mail. That means that, in roughly a 4 year period, as the transformation initiative was only announced in 2006, the organization averaged about a 9% savings a year in the public sector where it is under tight public procurement law, compliance, and regulatory demands. When you think about it, this is an absolutely amazing result.

In contrast, the U.S. Postal service is projecting a 14 Billion loss this year if it does not get legislative relief. 14 Billion! (Note that last year’s budget gave them 11 Billion legislative relief! Source: Red Dog Report (“obama budget includes 11 billion post office bailout”) And that this year’s budget is recommending another 11 Billion in relief. Source: Washington Post [postal service on tap for 11 billion bailout]) And this is the tip of the 238 Billion budget deficit it is predicting over the next decade if it doesn’t cut costs. (Source: United Liberty [united states postal service faces 238 billion budget deficit]) Given that it’s annual budget is about 68 Billion, based on expected Revenue for 2011, this represents a 20% loss! While Royal Mail was saving 9%, the US Post office was losing 16%, on track to lose 20% this year (and, based upon the projection of a 238 Billion deficit if nothing is done in 10 years, probably 30% plus in a few years).

Now, it’s tough when you have to deal with a drop in regular first class mail that amounts to 27% when compared with volume levels 10 years ago, especially when that is your primary source of revenue, but this drop was visible years ago, and efforts to reduce costs could have been underway years ago. The network should have been optimized 6 years ago, re-evaluated, and then optimized again last year. And, like Royal Mail, which was also dealing with increased competition and revenues declining at 5% a year for similar reasons, it should have focussed on vehicles and operations, business services, facilities management and property, IT and telecoms, and sourcing and demand management to do what it could to keep costs in line as much as possible year over year. Since network reorganizations of the type that the U.S. Post office has to undertake can take years, some losses were unavoidable, but this blogger finds it hard to believe that 14 Billion in losses were unavoidable. And, like Royal Mail, it should be making a hugh effort in Supplier Performance Management to help suppliers keep their costs down.

However, the most fascinating fact that is overlooked in all the news reports is the lack of focus on Supply Management. Back in 2007, the U.S. Postal Service licensed CombineNet’s advanced sourcing platform. While for years this platform, in the doctor‘s view, had usability issues in that self-service just wasn’t an option for most organizations, as per SI’s extensive coverage on CombineNet back in 2006/2007, when they were undergoing their first major transformation of the decade, this was one of the most powerful strategic sourcing decision optimization platforms on the planet. If the U.S. Post Office was properly applying this platform, the doctor believes they should have been saving money hand-over fist. After all, Royal Mail used Iasta, which only introduced its advanced sourcing platform in the 2007 timeframe, about 7 years after CombineNet, and saved big-time. (Note that this is not a knock against Iasta, as the platform they introduced was rock solid, but an attempt to make a point that the platform CombineNet had was seasoned and powerful enough to do what the U.S. Post Office needed it to do, including re-optimizing the entire U.S. Post Office service network.)

Supply Management can save just about any organization, but the organization has to be willing to use Supply Management, and the tools and techniques Supply Management brings to the table, and used Supply Management aggressively if the organization is serious about staying above water.