Procurement: Use of

Metrics
Lecture #2
09 February, 2014

Result Oriented or Process

Oriented

What are the

outcome of
procurements?

Primary Outcome
Categories
Cost
Quality
Supplier

Satisfaction
Implementation of new initiatives
Special interest issues

What should be the

objectives of
Procurement
outcome?

Outcome Objectives
Corporate
Objective
s
Purchasin
g
Objective
s
Commodi
ty group
A

Commodi
ty group
B

Commodi
ty group
C
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Cost Metrics
Expenditures

have increased

Prices

paid
Total ownership costs
Varies across firms; but clearly
oriented towards cost
reductions/savings

How would you

measure cost
reductions/savings?

Cost Metrics
Cost Metrics

Description

Reduced Cost (via

Prices)

Costs relative to previous year

Costs relative to other divisions or units
Costs relative to other regions

Change in cost Vs.

Change in market
index

Change in firm costs for an individual

type of service relative to change in a
market cost index for that service

Return on Investment

Dollar savings divided by procurement

spending

Calculating Cost Changes

Relative to Indices

Market Cost
Index Change

Firm Cost
Change

Metric
Savings

Service A

%5+

+3%

+2%

Service B

-5%

-8%

+3%

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Implementation
Considerations
Based

on comparison of costs

Across time
Divisions
Regions
For

periodic or one-time
purchases, data are often
insufficient

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Quality Metrics
Goods

purchases

%age of defective products

Difficult

concept to measure for

services
Customer Satisfaction

12

How would you

measure quality of
services?

13

Quality Services Metrics

Quality Metrics

Description

Customer satisfaction
ratings

Responses from customer satisfaction

survey regarding
Overall satisfaction
Satisfaction with specific dimensions of
performance

Service reliability

Frequency of service interruptions

Continuity of services

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Implementation
Considerations
Data

needed are generally not captured

by standard internal data systems
Designing & implementing effective
customer satisfaction surveys is a
complex and challenging task
Quality of data depends on:

Sample Size
Quality of sample
Question wording
Response format
Timing of survey
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Supplier Satisfaction
Metrics
Ensure

that they buying firm

continues to be able to conduct
business with the best suppliers
Forward-looking metric

16

How would you

measure supplier
satisfaction?

17

Supplier Satisfaction
Metrics
Supplier
Satisfaction Metrics

Description

Supplier satisfaction
ratings

Responses from supplier satisfaction

survey regarding
Overall satisfaction
Satisfaction with specific dimensions of
interactions
Satisfaction with different parts of the
buying organization

Complaints

Supplier-initiated concerns

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Implementation
Considerations
Data

collected via surveys

In-house surveys
Third-party surveys ensuring
confidentiality
Surveys

can be costly
Time-consuming for both buyer and
supplier
To save time & cost, conduct
supplier surveys only annually or
biennially
19

New Initiatives Metrics

Initiatives

to improve outcomes of
purchased products/services
Creating a supply base that is the right
size and composition Supply base
rationalization

Process

metric

Track progress with specific parts of an

implementation plan
Outcome

metric

Measure initiative results against prespecified goals

20

How would you

measure the impact
of new initiatives?

21

Initiative Metrics
Example
Initiative

Potential Process
Metric

Potential Outcome
Metric

Supplier
base
rationalizatio
n

Reduction in nonstrategic suppliers

Savings

Reductions in solesource reductions

Responsiveness
Customer Satisfaction

Supplier
Developmen
t

Number of people
involved

Savings

Number of projects

Improved performance

Personnel
Developmen
t

Number of training hours Mastery of desired skills

per year, per employee

22

Implementation
Considerations
Developing

initiatives,
implementing plans, goals and
their associated metrics is a
challenging, time consuming
process.

23

Special Interest Metrics

Not

included in other categories

discussed above
External or Internal concerns
%age spending directed to small or
minority owned business
Frequency/Severity of workplace
safety and security incidents

24

How would you

measure the health
of special interests?

25

Special Interest Metrics

Special Interest
Metrics

Description

Support of small or
minority-owned
businesses

Dollar spent with these firms

Safety & Security

Frequency of safety incidents

Percentage of expenditures with these

firms
Frequency of security incidents

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WHAT ELSE?

27

Internal Management
Metrics
Monitor

& improve management

of purchasing organizations
Complement the high-level
effectiveness metrics discussed
above

28

Internal Customer
Satisfaction
Firms

business units that utilize

the procurements services to
buy goods or services they need
Metrics evaluate how well the
purchasing organization is
meeting the needs of internal
customers

29

How would you

measure status of
internal
management?

30

Internal Management
Metrics
Internal
Management
Metrics

Description

Internal Customer
Satisfaction

Dollars spent outside the corporate

strategies (maverick buying)
Satisfaction rating based on internal
customer surveys

Personnel trainings &

retention

Process: Number of training hours per

employee per year
Outcome: Mastery of desired skills
Retention of high-quality employees

Ethics violations

Number of violations per year

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Implementation
Considerations
Special

data collections efforts

Tracking maverick buying occur
outside the purchasing
organization

32

Personnel Training &

Retention
Purchasing

organizations current and

future depends on the quality and
expertise of its personnel
Conducting analyses to design and
then implement optimal purchasing
strategies requires sophisticated skills
Track both process and outcome
metrics w.r.t. training
Track the retention rate of highquality personnel
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Ethics Violations
Firms

do track ethics violations

Particularly with respect to
interactions with suppliers
Sensitive endeavor
Reports of violations can come
from employees, suppliers and
may be offered anonymously

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35

thanK yoU

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