Procurement Performance Measurement
Procurement Performance is a question of the definition. Every organization has a somewhat different understanding as to what should apply as a success and thus influence the added value of the purchase. Procurement Performance Measurement provides an answer ...
Many people think that they have a measurement concept – until they see a really well-established one
What all flows into your performance measurement? Cost reductions of course, but also cost avoidance, quality aspects, and many other criteria. How the decision is made also depends on an executable, well-thought-out measurement concept.
Questions that companies should be asking themselves:
- Has procurement performance been achieved if a random procurement-relevant key indicator has changed positively from an economic perspective?
- ... or only then if additional costs were applied for the company by the procurement department?
- or/and ... is only that, which can be measured as cash flow relevant cost reduction in terms of profit, considered to be success?
- 4. or ... that, which we can demonstrate as an economically positive deviation with respect to official Budget planning?
What performance measurement fits with which?
A sensibly applicable logic for the measurement of performance additionally depends on which primary goals the company pursues with spend management:
Goal: “Assisting financial reporting”
In this case, the measurement of procurement performance primarily assists monthly financial reporting. The calculated KPI/key indicators are included in Reporting without substantial changes and must correspond to its guidelines.
Goal: “Data and potential analysis for strategic procurement”
The measurement of procurement performance and your underlying key indicators and KPIs should primarily assist procurement and, in addition to period routine evaluations (“monthly reporting”), enable in particular progressive data analyses as well. The goal of these analyses is to examine causes for deviations and conspicuities with regard to data as well as to show savings potential and therefore to improve the cost position of the entire company in the medium term.
Structured measurement of performance has a versatile application
In addition to these mostly strategic goals, there are also many pragmatic reasons as to how the measurement of performance is helpful. It supports the management of the procurement department with the following issues, etc.:
- How does procurement performance become visible in the projections of the profit and loss statement or how can savings effects be demonstrated in terms of profit?
- How can we show whether or not the performance of individual purchasers or the procurement organization overall has improved or worsened?
- How can the scorecard goals of the purchasers be more easily measured? (degree of fulfillment)
- How can we measure the so-called bottom-line savings of a purchaser or the entire organization?
- • How greatly do external market effects (e.g. exchange rate fluctuations, effects of quantity or raw material pricing changes or index effects), for which the purchaser is not responsible or which he cannot directly influence, influence savings?
Execution of systematic procurement performance management
Systematic Procurement Performance Management also requires strategic procurement to plan the aforementioned savings as well as to control and track in the sense of modern project management using a multi-level degree of implementation systematic.
Learn how you can implement this in the following article:
» Planning, Managing, and Measuring Procurement Success Using Degrees of Implementation
An integrated, systematic measurement concept for your procurement performance
If we strongly define procurement performance in its monetary value, the achieved savings become the focal point. The measurement concept shown in Diagram 1 can be used for this. First, we distinguish between the reduction of costs (cost reduction) and avoidance of costs (cost avoidance). Both ranges of analysis or measurement can be further divided in individual savings types:
Diagram 1: Integrated measurement and key figure model for spend performance
Learn more about the mentioned types of savings at:
» The 6 Savings Types
We offer you a holistic solution for increased transparency, potential analyses and measuring your procurement success regarding indirect purchasing with our DataCategorizer, SpendControl and InitiativeTracker modules.
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In this blog you will find expert knowledge about initiative management and project management in strategic procurement. InitiativeTracker is a software for planning and monitoring your sourcing initiatives, controlling your procurement organization and measuring your procurement performance.