KPIs to Measure Procurement and Supply Chain Cost Saving by Michael

4 Value Added KPIs to Measure Procurement and your Supply Chain in 2019

One of the key trends in 2018, within procurement, was KPIs (Key Performance Indicators) and how we, as a profession, go about measuring outcomes as we deliver more and more value to the organisations (both businesses and charities) that we work alongside and support with our services. Do we now need to consider measuring the "un-measurable" as we move into 2020?

Possibly. But we have just stated that they're "un-measurable" so we may need to come up with a plan. How can you put a KPI against risk management? Or people? Or productivity? It's time to quantify the value we deliver beyond "cost saving".

Completely disregarding one of our key capabilities (Cost Reduction) and the requirement for all businesses to track savings, wouldn't be wise but maybe it's time to outline the value-added areas of what we deliver in pound terms so that we can measure our value proposition in these areas.

We've highlighted 4 value-added areas that every procurement professional or business offering services within procurement, should be measured against:

Avoidance

We know there are a lot of procurement professionals within businesses out there who are tired of the old "cost savings" metric. We sort of understand it. But the reality is that financial cost saving is at least one thing that clearly defines our contribution. And ultimately, with the total cost saving figure we achieved in 2018 alone, you simply can't ignore it. If we turn our back on this, simply because people think "we should be looking beyond cost saving", then we have lost an important factor and quite plainly, one that delivers huge benefit.

However, we do need to ensure that the broader business audience understands procurement is about so much more than savings, and that we can clearly define value in other areas as well. So, one important point to make here is around cost avoidance. Don't report on this metric. Costs that have been avoided simply don't count.

Productivity

There are so many ways employees can deliver efficiency and productivity gains that result in bottom-line value for their organisations. Speed to market, data handling, avoiding rework and duplication, faster testing and processes or basics such as reducing inventory. But the pound value of this needs to be quantified (which is not impossible!), whilst still looking at relationships from a supplier's perspective too of course (relationships only work when you both deposit and withdraw from them).

Before you embark on one of these efficiency and productivity projects, work with your finance team to agree on a calculation for the pound value of the productivity gain, then deliver it, and stick to the agreed value!

Bonus Content; Supplier | Customer Relationships

During the sourcing process, where the supplier is evaluated, perhaps even audited, and then contracted, suppliers will often appraise whether these selection processes run fairly and competently. In the on-boarding and the execution part of the relationship, the supplier will possibly assess how the communications went, how easy it was to create and implement changes to the previous routines, and how the on-boarding was tackled. Is it fair for suppliers to act like this? They are, after all, going to be remunerated for their services so why should THEY be assessing the client/ customer?

When the relationship begins, the evaluation will typically be how time consuming or complicated it is to deliver goods and services, and whether the same information is requested by different people (it can be very very time consuming when this happens!).

When it comes to the relationship, ask your suppliers their opinions about issues that might affect them. When you've asked them, are you then open to the answer, to new ideas, new products, and new ways of doing things?

We know what you're thinking at this point. How would this benefit organisations? The time it takes to manage the relationship should become more effective. So should the visibility from spend analysis to sourcing exercises to strategic relationship management. As a result, it should help drive better relationships and help achieve a competitive advantage for both parties.

Risk Management

This is a powerful measurement that will capture the attention of CEOs and other executives alike. You see, the challenge with risk management (like safety) is that the ultimate success is when nothing goes wrong! But because organisations (and their personnel of course) can spend a lot of time and energy securing supply relationships and carefully managing contingencies, which result in absolutely nothing happening (which is a good thing!), it is often quite easy to take risk management for granted and be tempted to reduce funding and resources in this area.

So, rather than re-invent the wheel with a whole new set of measurements around risk, simply reframe risk in a safety context. Work with your safety department to understand their metrics, explain what you are measuring and get their advice on how they would construct metrics for risk management in procurement. Do the same with your IT department for your IT infrastructure and Telecoms (it's likely to be business critical after all!) and so on.

It is critical to illustrate the "risk" case with examples of how much market share and stock market value has been lost by competitors and peers when supply chain risk is not properly managed.

Bonus Content; Disaster Protection

Traditionally, businesses have valued this in terms of potential legal costs, but today it is so much more than that. Social media now ensures that your end customers (and the press) quickly become aware of issues, and these are amplified to such a point that they result in loss of market share.

Supply chain disruptions can have catastrophic impacts on brand value. Procurement, however, can play a huge part in protecting the company from this type of disaster, and risk management must therefore be highlighted and reported upon in our procurement KPIs.

Humans

Call people what you will, "assets", "capital", or even "resources" but human beings are frequently regarded as an enabler metric and it should probably be much more than that because procurement could be seen as a source of leadership talent for the business. Particularly if you believe that procurement provides some of the best commercial training of any function.

Procurement offers its team members the opportunity to work across the business internally, as well as externally. So, develop a metric that measures procurement's contribution to developing leadership talent. Once again, this is something to which senior leadership is very committed in some of the largest organisations .

The 4 KPIs to measure procurement and your supply chain:
1. Cost Saving (yes, we're biased, but it deserves to be number 1) - £s saved in X financial year
2. Productivity - £s released through working capital initiatives
3. Risk Management - Number of days supply chain disruption reported in media (objective is zero!)
4. Humans - Number of employees who have worked in procurement and are now in leadership roles

"So, rather than re-invent the wheel with a whole new set of measurements around risk, simply reframe risk in a safety context. Work with your safety department to understand their metrics, explain what you are measuring and get their advice on how they would construct metrics for risk management in procurement......................."