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New Measures Surface

#9: Take the Initiative: Continuing coverage of the trends shaping the profession

By Roberta J. Duffy, editor of Purchasing Today®. November 2000 Purchasing Today®, page 68.

Standardized, far-reaching, and broad-based enough to apply to all supply chain members, performance measurements will play a larger role in more strategic organizations.

The old adage says, "You'll get what you measure." If a supply manager is only measured on a price paid, then that price is likely to be low. However, if expectations about performance measurements are raised, to include more value-added factors, to align with organizational goals, or to consistently be applied to all organizations within the supply chain, then different results can transpire. This new attitude toward performance measurements is a possibility, according to "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," a joint research initiative from NAPM, the Center for Advanced Purchasing Studies (CAPS), A.T. Kearney, Arizona State University, and Michigan State University. The study indicates that performance measurements are one of 18 key trends that will shape the supply management profession in coming years.

In part, the study says that organizations will realize that costs - related to both materials and processes - are carried through the supply chain, so common performance metrics will be established across the same boundaries. The measurements will be standardized throughout industries and communicated and executed efficiently to second- and third-tier suppliers. All of these measures will also be linked to each organization's strategic goals.

While all of these predicted trends are extensive and innovative, one thing must not be overlooked. Price, which has historically been a measure of performance, will still be used by many organizations as the definitive measure of success for supply management. One executive interviewed for the study says, "I work for a company that is obsessed with costs. In order for us to be competitive, I have to buy better than our major competitors." Therefore, while performance measurements will go beyond the historic scope, price is still critical. The challenge often becomes defining those other "soft" measures, such as customer service, flexibility, and supplier management. Rating systems tend to strive for objective measures to these subjective concepts. Other possible measurements include quality levels, information technology, financial performance, organizational structure, network flow, asset management, workforce assessment, and impact on capital efficiency.

Identifying Measurements
There is some consensus on how to determine what to measure, at least for an individual organization. Experts say that performance goals must be tied to strategic business goals, and benchmarks will change from time to time. For example, working from the top down, from an organization's mission statement, can help a supply management department assess where it can contribute to those broad goals. Keeping this strong link to business strategies is also one of the best ways to attract the eye and earn the respect of the CEO. It advances the performance of supply management but also illustrates that it can function in a strategic, organization-minded capacity.

In addition to looking upward for performance measure guidelines, it's important to look around, also. Involving key stakeholders, such as internal customers, suppliers, employees, marketing, manufacturing, and other departments, in setting performance metrics ensures that important issues are addressed. Supply management can be successful on its own terms, but if it's not helping the other functions to meet their goals, then ultimately, supply management is not performing.

With entire supply chains operating toward common goals, there is an acknowledgement of just how greatly final price changes at the customer level will impact the entire chain's performance. "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" says that those changes will be quickly transmitted up the supply chain and be a key driver of performance.

Using the Data
Of course, once performance measurements are identified, established, and implemented, and the data is collected, the organization's work is not through. Using that data is the next step. The performance measurement information can be shared with internal units and analyzed so that all can collectively assess how broad business goals can be met. The data can be shared with suppliers, which could ultimately lead to process improvements or innovative products and services. However, most importantly, the information is dissected in terms of entire supply chain processes, with the hope that improvements can be made. Ideally, these improvements will benefit the chain's ultimate goals - more volume, efficiency, reduced costs, etc. - so changes will seem obvious to all.

For example, one organization was measuring its performance on a particular commodity's leadtime. The organization wanted to shorten the leadtime from seven suppliers who were all providing material. After measuring the leadtime and examining the factors that were contributing to it, it was determined that the volume given to each supplier was prohibiting a reduction in time. If greater volume could be given to fewer suppliers, leadtime could decrease. The organization reduced the supply base to two, was able to give each supplier more business, and negotiated with both suppliers to collectively aim to reduce leadtime with measurable results.

The next step is for the supply management organization to work closely with suppliers to implement these same practices with second- and third-tier suppliers. A consistent message, that grows from foundational supply chain goals can be well communicated and permeate to both ends of the chain.

Key Criteria
Many key factors will have to be in place if performance measurements are to function as predicted by "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast." First, there needs to be consensus on what the performance measurements are - not only the factors that will be measured but also the metrics. If quality is a measure of the supply chain, what standards will be used? If cost reduction is an item to be measured, what value will be placed on soft costs? Elsewhere in "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," under the topic of complexity management, the study predicts that dominant firms within a supply chain will influence other members of the chain. Performance measurements could be one of those areas where influence is based on size or technological abilities.

Second, in order for all of these measurements to be accurately assessed, and without committing overwhelming personal resources to do it, information systems that link the various supply chain partners will be necessary. Enterprise resource planning (ERP) systems have helped to some effect.

Third, the study says that many performance measurements will be highly dependent upon industry, and if supply chains are expected to have consensus, then common measurements and metrics must be defined. For example, what is an appropriate measurement of how many of a firm's non-labor dollars pass through a centralized supply chain management department? Justifiably, this figure will be different for a manufacturing organization with one or two plants than it would be for a retail operation where field offices do local purchasing. A supply management department's involvement in research and development will differ greatly between the biotech industry and the business services industry. Measuring that involvement will be unique, but should be standardized within the industry.

So, if the old adage is true, and organizations and supply chains are able to modify performance measurements and performance measurement practices, results should follow. Efficiency; cost standards that ultimately benefit all; and optimized customer service, delivery, and flexibility could all be targets.

18 Initiatives: Following the Trends, Combining the Elements, and Progressing Forward

Over the last several months, Purchasing Today® has presented commentary on several supply management trends that were originally outlined in a research study. This study, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," was a joint initiative by NAPM, the Center for Advanced Purchasing Studies (CAPS), A.T. Kearney, Arizona State University, and Michigan State University. (See the box below for information on how to obtain a copy of the study.) It identified 18 key initiatives that will shape the profession in coming years. As the final installment to this series, Purchasing Today® briefly recaps each of the trends and examines how they relate to each other. The trends are not listed in order of their importance, strategic value, or acceleration, but rather listed with the most agreed-upon trends first.

The Key Trends
Electronic commerce. The Internet will become the backbone of electronic purchasing. The challenge will be using the information created by electronic commerce in a truly strategic fashion. The overwhelming amount of information that electronic commerce creates will enable pull systems to play an important role.

Strategic cost management. Strategies to reduce costs will span the entire supply chain, not just a single link.

Supply chain partner selection and contribution. Supply chain associates will be chosen based on their potential for sharing resources, joint planning, and early development capabilities.

Tactical purchasing. Tactical purchasing will become more automated and likely to be outsourced, but supplier evaluation and development will remain in-house.

Purchasing strategy development. Supply chain strategy will have increased influence on corporate strategy. Performance of strategies and goals will have influence on compensation for supply management professionals.

Demand-pull purchasing. Full pull systems will allow supply management professionals to access, not only from a supply base but also from a customer base, information to track performance and meet demand.

Relationship management. Managing cross-enterprise relationships will have senior executive focus at the highest level. Relationship management will emerge as a core competency.

Performance management. Common performance measures will be tied to strategic business measures, and all of these measures will be enhanced by information systems capabilities.

Process uncoupling. Processes will be uncoupled, much like product lines were in the past. Any activity not considered core, or any activity that can best be accomplished by another party, will be outsourced.

Global supplier development. As organizations increase the amount of business they conduct on a global level, they will recruit suppliers to expand with them.

Third-party purchasing. Third-party purchasing of nonstrategic items will increase, but the process will still be heavily managed by supply management professionals.

Virtual supply chain. Organizations will create virtual legal organizations, focused on specific customers and markets. They will allow organizations to enter into short-term alliances.

Source development. There is no clear trend here as some believe competition among suppliers is healthy, while others feel developing long-term relationships is worthwhile.

Competitive bidding/negotiations. Many negotiations and bids will be handled by a third party or outsource provider.

Strategic supplier alliances. Increased competition and higher expectations will require supply management to be flexible and establish more strategic alliances to maximize leverage of resources.

Negotiations strategy. The nature of negotiations will change, moving away from the heated emotional confrontations and toward a mutual information-sharing environment.

Complexity management. Dominant organizations, based either on size or on technological abilities, will dominate other members of the supply chain, including second- and third-tier suppliers.

Collective Knowledge
In addition to understanding each of the trends and opening one's mind to the possibilities and challenges associated with them, supply managers can look at the group of trends as a compass for future activities.

When researchers first identified these trends, they also categorized them at varying levels of processes, including supporting/enabling processes, core procurement processes, and direction-setting processes. Some of the trends fall into more than one category.

Supporting/enabling processes include human resources management, information management, and performance management, and are associated with trends such as electronic commerce, tactical purchasing, and performance measurement.

Core procurement processes include strategic sourcing, supplier anagement/development, and day-to-day purchasing. These processes are associated with trends such as strategic cost management, supply chain partner selection and contribution, global supplier development, and strategic supplier alliances.

Direction-setting processes include supply management organization and supply strategy development, and are associated with trends such as purchasing strategy development, relationship management, process uncoupling, virtual supply chain, and complexity management.

What organizations can do with this structure is evaluate their practices and match up various functions and activities with the different categories to get an idea of where they are focused. For example, if an organization realizes that its resources and expertise are limited to tasks surrounding information management or performance management, then it knows that it is optimizing supporting or enabling processes, but might not be in a prime position to institute direction-setting processes, such as examining the structure and development of supply management.

One important factor to remember is that the predictions are not being projected as best practices. "That is not what the study articulates," says Phillip L. Carter, D.B.A., executive director of CAPS and a member of the research team. The results are merely reporting on what researchers believe will become more prevalent in the supply management profession. These initiatives could receive a great deal of attention and resources, but not prove to be the prime examples of doing business.

Read Them All
"Box page 71"

All of the articles that appeared in Purchasing Today®'s series, "The Future of Purchasing and Supply," are available on the NAPM Web site, www.napm.org. To view the articles, from the home page, select Purchasing Today® from the menu on the left. You will see a link to the series.

To see a copy of the study on which these articles are based, visit the CAPS Research Web site, www.capsresearch.org. From the home page, select Research, then Studies Completed.

Initiative #9: Performance Measurementsbr> "Box page 72"

The 1998 study, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," by NAPM, the Center for Advanced Purchasing Studies (CAPS), A. T. Kearney, Arizona State University, and Michigan State University, details 18 future initiatives that will shape the supply management function in coming years. Each month, Purchasing Today® highlights one aspect of the study. This month, the focus is on Initiative #9: Performance Measurements. The study offers the following predictions on this topic:

  • Supply chains will have a common set of core performance measures tied directly to individual organizations' strategic and business unit performance.
  • Some type of common performance metrics will need to be established, in particular for supply chains in specific industries.
  • Common performance measures will be tied to strategic business measures.
  • As supply chains are developed, new supply chain benchmarks will need to be developed and then tied to particular organizational goals.
  • Profit measures will not be routinely shared in the supply chain.
  • Integrated information systems will facilitate the reporting and use of these measures.
  • Market price changes at the final-customer level will be transmitted quickly up the supply chain and be a key driver of performance.