Competition for market share has intensified the pressure on organisations to reduce cost and improve margins.
Unfortunately, procurement has often been a neglected, under-invested and poorly-managed function and many executives have never been exposed to a good procurement team that is supporting business goals while also delivering against agreed targets.
However, procurement has in recent years fought hard to be recognised and, as a team or department, needs a robust method of demonstrating performance to show how it adds value and supports business goals. A lack of good measures can leave it vulnerable.
When demonstrating the value of procurement the first instinct is to present a traditional savings figure. But the challenge with using such a measure is the unstated trade-off with quality, inventory levels and long-term supplier relationships. There are also issues with credibility of any comparisons, for example evaluating what might have been spent, what it cost last year or against budget if procurement had not intervened.
A better option for your procurement team is to look at a range of measures and targets. There might be process measures such as transactions per person, value of purchases, accuracy, percentage of e-procurement or response times for queries. But all of these are vulnerable to challenges. These measures are about inputs, not performance, and should not be treated as a measure of success in their own right. Process measures and targets are of interest to the procurement function in looking at progress over time but they are not about performance and leave further questions about the substitution of quality, cost and time.
Some of the above are difficult to link explicitly to what procurement alone can do, because responsibility for many aspects of the work is shared, it is often difficult to attribute success or failure directly to procurement, for example inventory levels will be affected by other departments and the number of suppliers is neither good or bad in its own right.
In my next blog I will talk about demonstrating procurement performance to the wider organisation and how procurement scorecards could be the answer.
☛ David McDonald, director and general manager, Asia Pacific at Apsiz Services