Purchasing Performance Measures By Steve Lunden, M.B.A., CPSM, C.P.M. Director of University...
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Transcript of Purchasing Performance Measures By Steve Lunden, M.B.A., CPSM, C.P.M. Director of University...
![Page 1: Purchasing Performance Measures By Steve Lunden, M.B.A., CPSM, C.P.M. Director of University Purchasing Gonzaga University.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649d365503460f94a0dbcb/html5/thumbnails/1.jpg)
Purchasing Performance Measures
BySteve Lunden, M.B.A., CPSM, C.P.M.
Director of University PurchasingGonzaga University
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Measuring the performance of any purchasing department has always been a difficult task.
“If you can’t measure it, you can’t manage it.”
Is there an optimal set of metrics or measures?
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Today’s Objectives
Look at Purchasing Performance Measures from the perspective of:
1. Department level– How are the individual members doing?
2. Company level– How is the department doing?
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Whether public or private consider:
• What are your business objectives? – Use these organizational objectives to
determine the measurements needed.
• Search for measures that match with the goals. – Linkage must be established between
objectives and measures.
First Considerations:
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First Considerations: (cont.)
• Stakeholders must be involved in the determination of the measures.
• Senior management, the chief purchasing officer’s (CPO’s) superior, and major internal customers must be involved.
![Page 6: Purchasing Performance Measures By Steve Lunden, M.B.A., CPSM, C.P.M. Director of University Purchasing Gonzaga University.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649d365503460f94a0dbcb/html5/thumbnails/6.jpg)
First Considerations: (cont.)
• Don’t over or under measure. Find the “right” balance.
• Needs for measures will change. Today’s measures will differ from what will be needed tomorrow.
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Why measure?
• To determine how the Purchasing Department is doing
• To quantify cost reductions or avoidance that allow us to be more competitive
• To determine how individual buyers are doing• To evaluate the fairness of buyer “loadings”• To assess the effectiveness of any changes• To argue for more of the scarce financial assets
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What to measure?
• Purchasing is like the black box.
• Purchase requisitions (inputs) go into one side of the box.
• Purchasing magic happens.
• Goods and services (outputs) come out of the other side.
![Page 9: Purchasing Performance Measures By Steve Lunden, M.B.A., CPSM, C.P.M. Director of University Purchasing Gonzaga University.](https://reader036.fdocuments.us/reader036/viewer/2022062516/56649d365503460f94a0dbcb/html5/thumbnails/9.jpg)
?INPU
T
INPU
T
OUTPUTOUTPUT
Black Box of Purchasing
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What to measure?
• Purchasing efficiency– Performance against administrative budget
• Purchasing effectiveness– Inventory turnover ratios– Seasonal requirements may complicate
• Purchasing Functionality– Right item at the right time at right cost
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Inputs
• Purchase requests
• Change requests
• Research
• Stores/inventory requests
• Bids
• Special projects
• Other specific activities
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Outputs
• Goods
• Services
• Purchase Orders
• Change Orders
• Blanket Purchase Orders
• Contract Purchase Orders
• Authorization for payment
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What to measure
• Dollars
• Effort
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Measure the Inputs
How many or how much?
• Purchase requests• Change requests• Research• Stores/inventory
requests
• Bids• Special projects• Other specific
activities• Difficulty rating
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Measure the Outputs
How many or how much?• Goods • Services• Purchase Orders• Change Orders• Authorizations for
payment
• Purchasing card use• Recharges• Releases• New agreements• Difficulty rating
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How to measure
• Gather the data (monthly)– Manual– MIS
• Caution!!!
“What get measured, gets done.”
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What to measure• Dollars / Financial
– ROI = Return / Investment– ROA = Return / Assets employed
• Increased Quality– Production or waste savings
• Purchasing process improvements– EDI, E-procurement systems, vendor
managed inventory & pay on receipt • Transportation improvements
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What to measure (cont.)
• Spend
Annual spend
Monthly spend• Savings
Documented savings (hard numbers)
Cost avoidance savings (soft numbers)
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What to measure (cont.)
• Cost savings
• Vendor quality
• Delivery metrics
• Price effectiveness
• Inventory flow
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What to measure (cont.)
Effort• Transactions
Number of PONumber of line items
• Service measuresTurnaround timePercent on time
• Accuracy measuresRate of returns
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PurchasingMaterials costs/
prices
Product / quality
Purchasing logistics
Purchasingorganization
Purchasingeffectiveness
Purchasingefficiency
Purc
hasi
ng
perf
orm
ance
Materials price/cost control
Purchasing’s involvement in new Product development
Purchasing and Total Quality control
Adequate requisitioning
Order and inventory policy
Supplier delivery reliability
Personnel
Management
Procedures & policies
Information system
Materials price/cost reduction
Key areas of purchasing performance measurement
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Suggested Measures
• Total annual spend
• Total number of suppliers
• Annual spend by commodity
• Cost savings per procurement investment
• Cost per purchase order
• PO per FTE
• Line items per FTE
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Suggested Measures (cont.)
• Error rate
• Procure to pay cycle time
• Diversity initiative success
• Percent of defective items by supplier
• Back order ratio by supplier
• On time receiving rate
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Suggested Measures (cont.)
• Return rate (returns / total line items)
• Cycle time
• Purchase price variance
Target price – Actual cost
• Purchase order variance
Original price – Actual cost
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What to do with the measures?
• Make graphs and charts
• Why? – Because Management loves charts and
graphs.– Easy method to show activity– Allows historical comparisons
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What to do with the measures? (cont.)
• Look for trends
• Present to management
• Use consistency
• Compare over time
• Compare to historical– Month to month– Year to year– Average to average
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What to do with the measures? (cont.)
• Argue for more of the scarce assets DollarsPeopleTechnology
• Argue for ControlCentralization or decentralization
More / less• Distributed access (Purchasing cards)
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Individual Loadings
• This is the sum of inputs and outputs of an individual buyer.
• We are attempting to quantify “How busy” an individual buyer” is comparison purposes.
• The “difficulty factor” is very subjective.
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Departmental Transaction Loading Totals
0
5000
10000
15000
20000
25000
Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 Period 7 Period 8
Total Transactions
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Monthly Loading by Buyer
Buyer Loadings
0
100
200
300
400
500
600
Janu
ary
Febru
ary
Mar
chApr
ilM
ayJu
ne July
Augus
t
Septe
mbe
r
Octobe
r
Novem
ber
Decem
ber
Tra
nsa
ctio
ns Buyer 1
Buyer 2
Buyer 3
Average
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Transaction Variance by Buyer
Transaction Variance
-100
-80
-60
-40
-20
0
20
40
60
80
100
Janu
ary
Febru
ary
Mar
chApr
ilM
ayJu
ne July
Augus
t
Septe
mbe
r
Octobe
r
Novem
ber
Decem
ber
Var
ian
ce Buyer 1
Buyer 2
Buyer 3
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Public Sector Nuances to Performance Measures
• How can the School District determine if our Purchasing Department is an added value to the District?
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Who gets to Vote on our Worth?(Stakeholders)
• Internal Customers:
School District Board of Directors
Superintendent’s Cabinet
Budgetary Authorities
Accounting Department Partners
Ultimately the teachers & students
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Indicators of Our Added Value to Internal Customers
• Compliance with Applicable Statutes
• Needed Product/Service received on time and at right (best) price
• Clean Audits
• High Level of Customer Service
(Personal Buyer Model for big spending deptarments)
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Who else gets to Vote on our Worth?
• External Customers
Vendors
SW/PW Contractors
Personal Service Providers (using SS#)
Community Collaborative Partners
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Performance Measures for External Customers
• Are we Fair?
• Well written Solicitations, Contracts and Agreements
• Good overall Communications & Relationships
• Good Problem Resolution Skills
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Department Level Strategy
• Reliable
• Competent & Knowledgeable
• Timely
• Helpful
• Friendly
• Proactive
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Staff Level Strategy
• Hire good people
• Provide regular & relevant staff training
• Cross train staff (generic job descriptions)
• Match assignments to individual’s interests, experience and aptitude
• Act as a personal buyer in a way that elicits trust, successful outcomes and develops enjoyable working relationships
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Staff Level Strategy (Continued)
• Re-allocate work load periodically to:
* Keep work fresh and challenging,
* Allows for cross-training,
* Encourage individuals to explore & grow in various procurement specialties
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Staff Level Strategy (Continued)
• Stress Team!*Help out when someone’s overwhelmed
*Sub for the absent as needed
*Challenge each other on public purchasing law, principals, ethics, etc. when opportunities arise
*Celebrate together when you can (birthdays, seasons, significant events) and always with food
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Helpful Measures of Success
• Built in Accountability to each Transaction
• Weekly briefings reveal buyer productivity, timeliness, attention to detail, competence
• Director receives feedback from external & internal customers
• Budget Time – is our department asked to cut positions in tough economic times?
• Has department grown in scope & duties?
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Questions?