how to effectively measure a procurement organization sample

Consultancy Negotiation Skills Development Recruitment Interim Management Asia Sourcing

© PMMS Consulting Group 2008 All Rights Reserved

How to Effectively Measure a Procurement Organization

Consultancy Negotiation Skills Development Recruitment Interim Management Asia Sourcing© PMMS Consulting Group 2008 All Rights Reserved 2 www.pmms-group.com

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Contact Details

• Contact us for more information

Julie Brignac, Principal+1 305 890 9078

[email protected]


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Course Overview

• Why is measuring Procurement important?

• You can’t improve what you can’t measure– But most organizations think they are “too busy” to

implement sustainable metrics – and live by them

• You will learn in this course how to– Recognize which metrics are best to implement,

depending on the Procurement organizational structure– Develop sustainable metrics that leadership will notice

and respect

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• Identify successful, foundational key measures for varying Procurement organizational structures

• Develop effective measurements for any type of Procurement function

• Articulate how to strategically manage the organization to positively affect these measures

• Define the metrics that each Procurement practitioner should have to evaluate their performance

• Explain the most effective reporting venues

Course Objectives

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Building a Measurement SystemHow do you identify which metrics will work best?

Top 3 indicators to a successful measurement

system

Questions to ask

1) Understand who and how purchasing happens in the organization/company

Is it centralized or decentralized?

2) Review the company’s strategic business objectives

Which ones are linked to Procurement?

3) Determine the priorities for Procurement

Cost savingsInventory

managementeProcurement

solutions5


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Top 3 IndicatorsBuilding a Measurement System

1) Who is doing the purchasing?

a) Build a process map to find out

Example: Purchasing capital equipment designed by a company’s internal engineering department.

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Purchase Capital Equipment

Pu

rch

asi

ng

En

gin

ee

rin

g

Designs new equipment

Locates potential suppliers

Documents equipment

specifications

Are selected suppliers qualified?

Issue RFQ to suppliers

Evaluate bid responses

Input to RFQ scope of work

Negotiate pricing for equipment

Purchase equipment

Yes

No


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Organizational Examples

Centralized Procurement Decentralized Procurement

Purchasingactivities

Purchasingactivities

Oth

er

fun

ctio

ns

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Key Foundational MetricsRegardless of Organization

Key Metrics Sub-Metric Examples

Supply Base Statistics Number of suppliers – active and inactive (need to define)

Proportion of items under contract

Productivity/Cost Savings Price per annum comparison

Cost per Purchase Order Number of POs issued

Total Cost per PO

Segregation of Duties Authority limits and proper processes established for requisitions, purchase orders, invoice payments

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Centralized ModelThe Most Effective Metrics

• Supply Base Statistics– Number of active and inactive suppliers– Number of strategic suppliers

• Secured via contract

– Compliance• Number of purchase orders placed with strategic

suppliers

• Productivity/Cost Savings– Year over year (YOY) price paid per unit comparison– Inventory levels

• Total inventory reduction – YOY $• Inventory levels ($) by strategic supplier

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Decentralized ModelThe Most Effective Metrics

• Supply Base Statistics– Number of active and inactive suppliers– Number of purchase orders placed with each supplier

• To evaluate opportunity for leveraged buys

• Cost per Purchase Order

• Compliance– Number of employees issuing purchase orders– Volume ($) of purchases issued without purchase

orders

Productivity difficult to measure in this scenario due to variation of purchasing methods and venues10


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Key Metric DefinitionsProductivity

1. Tangible Savings (Cash)

2. Intangible Savings (Redistributed and Infrastructure Costs)

3. Cost Avoidance

4. Value of Lost, Obsolete and Redundant Supplies

1. Annualized purchase price savings, fully realized, operating cost savings and value-adds that result in bottom-line contribution

2. Reductions in infrastructure requirements and/or operating costs for supply chain (facilities, people, equipment, etc.) that are not seen in the organization’s bottom line

3. Price increases, deterioration of services and other hidden costs that were avoided through supply chain

4. The value of supplies lost, damaged, sold (lost asset value on disposal) or time expired

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Effective Reporting Venues

Reporting Alignment

Business Financial Statements

Functional Procurement

Balanced Scorecard

Individual Procurement Practitioner

Reports reviewed by functional

leader

Reports reviewed by business leadership

Reports reviewed by senior

leadership and CEO

Reports reviewed by board of

directors and shareholders

All metrics are aligned

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how to effectively measure a procurement organization sample

Business

procurement important

procurement practitioner

sustainable metrics

key foundational metrics

purchase order number

purchase orders volume

type of procurement

total cost