KPI of yesterday
Looks like we are escaping the era of Procurement as cost center, where main KPI was connected to the lowest price. I was working with Procurement quite many years. And I am a witness of this big paradigm shift.
In the late 1990’s we were measuring the success of Purchasing and Procurement as the amount of savings you’ve made. Sounds reasonable? Maybe, but it cannot work in vacuum!
Many organizations (including the ones I was working for) were so much concentrating on prices and price reductions, that risks were largely ignored!
We ignored the risks of availability – choosing the cheapest transport operators.
Also we closed our eyes to quality risks – choosing the best prices after each RFQ, without even knowing the supplier.
And we didn’t think about health and safety aspects – blindly trusting that supplier will ensure these risks by themselves…
Modern market economy doesn’t tolerate such risks. The potential impacts are non-comparable to what they were 20 years ago. Within few days any bad news can completely smash any company. This can lead to big financial, reputational and market shares losses.
So here are 4 main areas of KPI’s which MUST be included and monitored at any Procurement organization and Supply Chain.
It all starts here. In fact you cannot survive in the long run if your strategy will be to ignore quality. Maybe the company will manage to make good profits in a short run. But strategically such company will simply not exist.
The main quality KPI’s I recommend to use for the Procurement organizations are:
- Customer satisfaction index (this is more than just quality in fact…)
- Cost of Poor Quality (COPQ is a monetary equivalent of poor quality, really makes you think differently about quality)
If the product is not available for the customer – it doesn’t matter how good was the price or quality. It must be there! So pay enough attention to:
- Delivery accuracy – are suppliers delivering in-time? (this parameter is showing the performance of suppliers)
- Availability for the customer – are customers receiving goods in-time? (this parameter is showing the performance of Procurement organization and entire Supply Chain!)
Of course costs are important! And we enjoy global competition and possibilities of comparing prices instantly. That is why customers are more price sensitive as ever before!
So pay attention to:
- price development (comparing your current prices with the previous periods. You should constantly work on decreasing the prices)
- efficiency (how are you and your suppliers improve processes)
- Total Cost of Ownership (think about the value proposition. Are you really improving TCO, or you are just sub-optimising?..)
For me it goes without saying. Our procurement organizations are influencing the planet so much! Though we simply cannot avoid having own responsibility:
- for the environment around the Supply Chain partners
- social aspects of the people working there
- health and safety of the final consumers of the goods, as well as people working at production, logistics and so forth
- work conditions of the employees
Again, you as Procurement organization can do a lot here. For example, you can set the clear requirements on the above mentioned points. And use those requirements as qualification criteria for supplier selection process.