Why Supplier Performance Needs to Measure Up
1st October 2014 | Jonathan O'Brien
In this article, Jonathan O’Brien shares his insight on measurement in purchasing
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.
Yet other indirect functions typically don’t seem to be held quite so accountable; I don’t know of too many legal functions that need to demonstrate how good their contracts are, or HR functions required to prove just how effective they are at implementing policy. So why is purchasing different?
In organisations purchasing might typically need to account for what it does through financial efficiency indicators, such as Purchase Price Variance, cost savings, ROI or contribution to EBITDA (Earnings Before Income Tax, Depreciation and Amoritization). However, these typical 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 function 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 function to hit targets.
As we know, suppliers don’t typically serve our function; they serve an entire business and have relationships with stakeholders across the entire firm. Furthermore, other parts of the business are also 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 approach’ not a ‘purchasing function 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.
So we can develop scorecards to manage suppliers that feature a range of measures that reflect how the supplier is contributing overall. Here we see a second challenge and that is ensuring that we select the right measures and key performance indicators. It doesn’t follow that putting in place a measurement system will 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 percent on-time delivery’. He had recently joined the organisation from a high volume production environment where on-time in 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 the CEO had experience of; one where the production line would stop if one component was missing. In fact, most work was project related and while a late delivery would be a problem, it would usually be a problem that could be accommodated within the overall timeline of the project or by switching project priorities. There was in fact no real need for 99 percent on-time delivery from all suppliers and the effort to hit the target prevented the firm working on more value adding activities elsewhere.
So supplier performance measurement is much more than a purchasing activity, it serves a business wide interest and we must also think carefully about ensuring we measure the right things or we can end up satisfying measures over improving performance and contribution. At this point it would be easy to think that maybe measurement serves no useful purpose and we should give up. This is incorrect, as measurement can be both essential and helpful, but to be so, we must consider carefully what we measure and the way we measure - but also how these measures can be used to drive the outcomes we strive after. That is not something that happens by creating a lengthy scorecard, but by careful thought about what exactly we are trying to achieve with a supplier and how we can know we are moving towards that goal.