The purpose of measuring purchasing performance is to give people feedback on the achievement of goals and objectives that have been set. The way to do this is to decide what needs to be measured, set targets for the level of performance you want, compare current performance to those targets, decide what action (if any) to take, and then verify that the action has been met. has been taken and has been effective.
Here is a simple 9-step process for measuring procurement performance.
1. Write down your key objectives. Remember that a goal is a broad statement of your intentions and an objective is a means to achieve the goal. It has a beginning and an end and is measurable. For example, our objective in acquisitions might be to obtain significant benefits for our organization. So our goal could be to reduce costs in the next 12 months by achieving an average price reduction of 5% through better sourcing strategies. Your primary goals should be traceable to your corporate goals to show how your role supports the organization.
2. Identify the activities that are critical to achieving those goals. In our example, critical activities might be assessing sourcing risk for those categories that represent 80% of our total spend and developing sourcing strategy options for high-spend and high-risk categories.
3. Decide the best way to measure those activities. For our example, this might be having a governance process that approves the sourcing options that we develop, so one way to measure activity would be to measure the percentage of approved sourcing strategies based on the number submitted.
4. Set goals for activities. Now that we have a way to measure critical activities, we now need to set goals. In our example, this might be having an initial goal of 60% of sourcing strategies submitted for review being accepted.
5. Decide what data you need to collect. The data you need will be dictated by the performance measure you set.
6. Assign responsibilities. The data is not collected, analyzed or reported by itself. These tasks should be assigned to those who have the skills and aptitudes to perform them. Having the time to do so can be an issue that needs to be addressed by looking at your priorities and resetting them as needed.
7. Turn data into meaningful information. Data by itself is generally meaningless, it is just a collection of facts. However, when you have processed, organized and structured it, you have created information, intelligence that allows you to take action. For example, data that tells you how much was paid for a list of items isn’t valuable on its own. When you’ve processed it so that you have an analysis showing that you paid different prices for the same item from different vendors, you’ll have useful information.
8. Communicate the results. Your performance measures need to be communicated. This is because different people at different organizational levels will act on them. In particular, the results of your measures must be linked to the processes, to the improvement projects and to the people responsible for both. This needs a performance management system.
9. Take action. Knowing that performance measures exceed or fall short of the goals you’ve set is of no use unless someone takes action. This can be a corrective action to get you back on track or an action to further improve performance.