Category Archives: Metrics

Procurement Trend #09. New KPIs

Only six sinsational anti-trends to go. That means we’ll reach the end of this series in two weeks. We should be all happy, happy, joy, joy! But how can one be joyful when one realizes that this means we had to slog through a two-four of anti-trends to get here, and that some of us probably had to drink a two-four in the process to keep the dark thoughts at bay! And, to be honest, the doctor is really worried that there is no skin left on the futurists’ drum (which has taken more of a beating than any drum set Neal Pert has ever owned) and that, giving their predilection for ancient trends, these futurist historians may try to skin LOLCat to give their drum new life.

So why do these funky* futurists keep trying to push new KPIs as a future trend? Is it because of their fondness for three-letter acronyms that stems from their party-hardy frat-days (filled with a little too much beer pong)? the doctor has his suspicions, but it’s probably because they finally figured out that:

  • what gets measured gets managed is still true

    and KPIs require measurements

  • new processes and new technologies mandate new measures

    so KPIs need to be updated whenever a new process or technology is brought in, which should be a regular occurrence in a best-in-class Supply Management organization that makes an effort to keep up with the times

  • new measures provide new opportunities for improvement

    just like new Intel cores have provided new opportunities for faster computation ever since it was all about the pentiums

Measure to Manage

If the only reason that you are measuring spend, year-over-year changes, and captured savings is to report those metrics at the monthly meeting, then you are doing it all wrong. If you are not using base measurements as a foundation to identify inefficiencies and opportunities for improvement and repeated measurements as the foundation for evaluating progress, then you shouldn’t be measuring in the first place. You’re better off spending your time in old-school hard-nosed negotiations because, at some point, you might actually whip that sales rep so hard that he forgets which way is up and goes under the floor just to escape the verbal onslaught. (Of course, you will create disdain in the supplier who will do the bare minimum to fulfill the contract terms and, if the rep buckled too much, you might even bankrupt the supplier who hopes to make it up on future deals but never does, but hey, at least you got those impossible savings, right?)

Measure to Master

It’s not enough to measure just to track the status and success of current initiatives, you should be measuring with a goal of achieving mastery. If the benchmark for the average throughput in your industry is 100 invoices/day/clerk, then you should be striving to get your exception-based invoice automation process to 100/day/clerk error-free invoices and nothing less should do. If you don’t get there in the projected amount of time, you should be introducing new measures that break down, or influence, the process flow such as resolution time per exception invoice, average buyer response time per clerk contact, average number of line items on a problem invoice, etc. until you figure out where the slow-down is and what you should do about it. (Automatically reduce exceptions by kicking invoices back to suppliers with explanations of errors and do not allow resubmission until corrected, mandated response within 48 hours or a black mark in the buyers’ performance review, break down POs to insure more manageable invoices, etc.)

Measure to Excel

This means not just measuring process, throughput, and savings but finance measures favoured by the C-Suite, even if they do not help Supply Management directly improve performance. At the end of the day, if Finance is happy, the C-Suite is happy, and Supply Management is much more likely to get the financial resources it needs to implement new systems and processes that will ultimately improve the metrics even more.

* and not the good kind of funk

The Category Sourcing Scorecard – An Essential Tool for Collaborative Category Sourcing

Collaborative Category Sourcing is the foundation for eSourcing 3.0, whatever that happens to be. Why? As pointed out on SI, it is the only way to achieve savings above and beyond the limits of spend analysis and/or decision optimization, which max out at an average of 11% and 12% respectively, and this is especially true when the category has been strategically sourced (repeatedly). And the savings can be substantial. As pointed out in SI’s recent white-paper (sponsored by BravoSolution) on the Top 10 Technologies for Supply Management Savings Today (registration required), if the right combination of technologies are applied in the right way, they can often deliver 15%, 20%, 30%, and even 40% savings on hundred-million plus categories which were heavily scrutinized in the past and where little or no savings are expected. That’s why collaborative sourcing — which works best when it’s category focussed — is needed.

But how do you select the right category to start with? It’s certainly not as simple as selecting the category with the largest spend, the category with the least recent sourcing exercise, or the category coming up for renewal in six months. There are a number of internal, market, supplier, buyer, and category-specific factors that need to be taken into account — and this recent post on The Category Sourcing Scorecard over on CPO Rising did a great job of summarizing the vast majority of them.

Internally, the right category is the one with a contract maturing at the right time (which is typically three to nine months in the future, depending on the time it will take to do the sourcing project right), a documented sourcing history, a number of concerned stakeholders — who are willing to be engaged, and an accessible spend history (which, although not clear from the summary, should also contain usage, return, and inventory history).

From a market perspective, there should be enough competition to make an event worthwhile, the availability of one or more substitutes (if the current product has one or more patented, single-source, components), some bargaining power for the buyer, and barriers to market entry for both the product the buyer is producing and the capabilities offered by the suppliers (as, otherwise, new suppliers could set up shop overnight, sell to new buyers at cut-rates to establish business, and hurt your entire supply chain). In addition, the supply/demand (im)balance, which factors into the buyer’s bargaining power, should be known and relatively predictable.

From a supplier perspective, it should require some specialization (that the supplier can use to set itself apart), provide for profit margins, contain value-add components (valuable to the supplier and your customers), and a level of technical excellence. In addition, there should be suppliers who are financially stable, innovative, and willing to work with you to find substitute raw materials, components, designs, or production processes that will take costs down and push quality up.

From a buying perspective, there should be the potential to achieve some supply assurance, minimize production impact, save money, and require a production volume that will be attractive to the suppliers. In addition, there should be some signs that costs and risks can be reduced significantly enough to make the project worthwhile. This could take the form of falling raw material prices, the recent introduction of innovative new manufacturing technologies, or increased market competition.

From a category perspective, impact, complexity, and lead time will definitely be key factors, as noted by the post, but so could organizational importance, sustainability, and C-suite support. This will often be the hardest category to judge and score.

Which brings us to the following question – how do you score the scorecard? Do all the categories have equal weight, or are some more important than others? Making them all equal is certainly a valid starting point, as it will let you quickly eliminate categories that are really bad (with low scores in multiple categories), but may not be enough to let you choose between a category which scores great except for market factors, another which scores great except for supplier factors, and a third which scores great except for category factors.

In reality, the right scoring framework will be dependent upon the ultimate goal. If the ultimate goal is (still) to reduce cost, then the market factors should get the most weight. If supply assurance is the most important goal, then the buying factors should get the most weight. And if innovation is the desired outcome, the supplier factors should likely get the most weight. While it’s hard to make a hard and fast rul, here’s a good starting point for weighting.

To Focus On: Put a Higher Weight On:
Cost Market Factors
Supply Assurance / Risk Mitigation Buying Factors
Innovation / Value-Add Supplier Factors
Stakeholder Inclusion Internal Factors
Organizational Strategy Category-Specific Factors

Are You Revenue/Growth Enabled? Take This Hackett Group Survey and Find Out!

Today, the Hackett Group released their latest study — the Revenue Growth Enablement Study. The goals of this study are to determine in what ways a Procurement organization can enable revenue/growth scenarios for the organization as a whole, how far an average organization is down the revenue/growth enablement path, and what practices leading organizations are using to enable revenue/growth. Given the burning need for leading Procurement organizations to not only do more with less, but contribute to the top and bottom line in even more ways, this is an important study. For Procurement to earn, and keep, that seat in the C-Suite, it has to continue to deliver value year-over-year. And the best way to deliver that value, once it has trimmed costs, is to help the organization grow (with its expertise in operations management), globalize (with its expertise in foreign markets) and increase revenue (with its expertise in logistics, multi-stage and multi-channel inventory management, and new product introduction [NPI]).

Not only will this study give you ideas on how to identify growth priorities, tactics to support those priorities, metrics to measure success, NPI, and support sales and marketing, but it will qualify you for the full study results and final report when the study is complete. And in the meantime, you get one of the following five reports free upon survey completion:

  • 2012 Procurement Key Issues Study
  • Category Management – Beyond The “Strategic” in Strategic Sourcing
  • Supplier Relationship Management (Part I: Tapping the Power of Top Performance in SRM)
  • Defining & Expanding the Value Proposition of Purchase-to-Pay
  • A New Procurement for a New Normal

The 2012 Procurement Key Issues Study identifies the top 10 issues for Procurement organizations in the coming year, with the acceleration of revenue growth leading the way. (That’s why this study is so important.) It also discusses some key strategies for enabling profitable growth, including globalization — which will nearly triple within three years, as determined by the Hackett Group in their “Globalizing Procurement’s Service Delivery Model, Not Just the Supply Base”. (For some key stats, see SIs recent post on The Global Agenda — It’s Coming!.)

The study on Category Management, which attempted to go beyond the “strategic” in strategic sourcing, found that despite the additional savings opportunities that can come from category management (as chronicled by a number of Procurement leaders in Hackett’s conferences last year and by leading sourcing platform providers like BravoSolution), only 5% of companies have a category-focussed strategic sourcing process that is very well implemented or truly strategic. The majority of companies pursuing strategic sourcing (54%) are just average with a process that is fairly well implemented, but which does not push the boundaries. The report, which clearly defines the difference between a standard strategic sourcing approach and a category management approach, takes a deep dive into category management objectives and strategies, the supply management service line it enables, and provides a strategic category management framework that can jump-start an average organization looking to take it to the next level.

The study on Supplier Relationship Management, the first in a series, is extremely insightful on the importance of good SRM which is not just foundational for sourcing success, but transformational from a value viewpoint. It was found to increase cost savings / avoidance in top performers by almost 80% and growth-related benefits by 53%! SRM drives almost 45% of total Procurement value in top-performers! This is a level of improvement not achievable by any of the Top 10 Technologies for Supply Management on their own or even combined in a pair! Only collaborative sourcing, which embraces supplier relationships, can reach this level of value. The paper also identifies key differentiators of top performers and a model for SRM success that you can use to jump-start your organizational effort.

I haven’t reviewed the last two papers, but Sunday’s post pointed out how the UK Government expects to save £40 Million a year just by paying SME construction suppliers directly through P2P. P2P is full of opportunity, and I’m sure this paper will provide deep insights that can be used to jump-start an initiative. Finally, while There Is NO New Normal … Just the Old Normal Coming Back, there is a need for New Procurement Technology to cope with the return of an Old Normal that had passed before such technology hit the scene, and if any research organization is going to nail what that technology is going to be on the head, it’s the Hackett group.

To take the the Revenue Growth Enablement Study (enabled by their new, interactive, Qualtrics tool), and get your free research (and make your organization better for it), join the World Class Procurement LinkedIn Group.