Procurement 19 May 2016
Why supplier performance needs to measure up
Positive Purchasing CEO Jonathan Obrian explains why measurement is key when it comes to managing your micro firm’s suppliers. In procurement, it seems we are very keen to measure things. Usually, this means measuring the overall contribution of the purchasing function, necessary if the organisation needs purchasing to demonstrate how it adds value. The person in charge of purchasing might typically need to account for what they do through financial efficiency indicators, such as purchase price variance, cost savings, ROI or contribution to EBITDA (Earnings Before Income Tax, Depreciation and Amoritisation). However, these measures are largely financial and seek to inform a wider business financial management system, yet such efficiency measures alone do not reflect the full extent of purchasing activities. The problem is that measuring the performance of the purchasing department does not necessarily ensure we are measuring supplier performance. Perhaps the efficiency measures for the purchasing function flow down to suppliers who are then required to demonstrate savings or cash retention, but in isolation these measures serve only to enable the purchasing manager to hit targets. As we know, suppliers don’t typically serve one function they serve the entire business and have relationships with other stakeholders in the company, too. Other people in a micro organisation will also be interested in supplier performance and so might look to purchasing to measure the supplier in other areas such as delivery or quality compliance. Therefore, supplier performance measurement is distinct from purchasing function measurement and could be regarded as a business measurement? rather than a purchasing measurement? approach, but likely to be coordinated by the purchasing function. It may include measures of purchasing efficiency, but together with wider measures to satisfy the entire business. You can develop scorecards to manage suppliers that feature a range of measures which reflect how the supplier is contributing overall. Yet herein lies a second challenge, which is ensuring that we select the right measures and key performance indicators. It doesnt follow that putting in place a measurement system will necessarily improve performance. If we measure something then the result is usually that the supplier’s behaviour and, indeed, our behaviour will centre around achieving these measures first and foremost. I worked with an organisation where the CEO had decreed that he wanted to see all suppliers of direct material achieve 99 per cent on-time delivery. He had recently joined the organisation from a high volume production environment where on-time full delivery was critical. He believed that measurement was an essential part of achieving this. The purchasing team responded by directing resources at putting the necessary systems in place and working with suppliers to hit the target. Yet the company was a very different business to that which the CEO had experience of one where the production line would stop if a single component was missing. In fact, most work was project related and while a late delivery would be a problem, it could usually be accommodated within the overall timeline of the project or by switching priorities. There was in fact no real need for 99 per cent on-time delivery from all suppliers and the effort to hit the target prevented the firm from working on more value adding activities elsewhere.