04/19/23Managing Purchasing

Performance 1

2. Performance Management & Metrics

Dr Margaret Farrell margaret.farrell@dit.ie

Instructor: Dr. Nabil El-sakka (PUA University)

Nabil.abmed@pua.edu.eg

04/19/23Managing Purchasing

Performance 22

• 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

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Performance 3

2. Performance Measurement and Management

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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 Functional reviews (5 years) Policy and procedure audits (annually) Day-to-day performance measurement and evaluation

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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

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Performance 6

High Purchasing functional reviews

Purchasing policy and procedure audits

Purchasing measurementand reporting againstpurchasing operatingobjectives.

Low

Weekly/ monthly Quarterly/ annually MultiyearTime interval between measurement and evaluation

Figure F - 1: Purchasing measurement and evaluation frameworkSource: Fearon, Dobler and Killen

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Do you agree?

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Performance 7

Purchasing functional reviews

Situational analysis, supported by senior management Where are we today?

Where do we want to be tomorrow

Are the structure, policy and people available to achieve our objectives?

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Performance 8

Purchasing performance measurement

Supplier quality and delivery Price competitiveness Profit improvements Inventory Transportation costs New product and process improvements Administration and control Work load efficiency Environmental – Societal - Regulatory Continuity of supply and material flow

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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

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Performance 10

Alternative Hierarchical position Performance Viewpoints of purchasing measure

Purchasing as an Low in organisation Number of orders, order operational backlog, purchasing administrative administration lead time, function authorisation, procedures etc. Purchasing as a Reporting to Savings, price reductions, commercial management ROI measures, inflation function reports, variance reports. Purchasing as a Purchasing integrated Savings, cost reductions, part of integrated with other materials- supplier delivery reliability logistics management related functions reject rates, lead time

reduction Purchasing as a Purchasing represented ‘should cost’ analysis, strategic business in top management early supplier involvement, function make or buy, supply base

reduction Figure: F - 1: Management Views of Purchasing (van Wheele)

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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

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Performance 12

a. Strategic Plan/ Vision/

Goals

e. Company contribution

f. Competitive Advantage

b. Procurement & supply plan/Vision & goals

c. Commodity teamPlans & goals

d. Measures

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)

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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

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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 31st March, market based price index for item = 125 30th June, market based price index for item = 128

Market Index Change = (128-125)/125 = 2.4% increase

Price Paid 31st March actual Price paid = €150 30th 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%

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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

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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

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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

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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

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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