What Is Purchasing Success and How Do We Know If We Did It?

Author(s):

Dr. Alan Raedels, C.P.M.
Dr. Alan Raedels, C.P.M., Professor, Portland State University (www.pdx.edu), Portland, OR 97207, 503/725-3728, alanra@sba.pdx.edu
Dr. Lee Buddress, C.P.M.
Dr. Lee Buddress, C.P.M., Assistant Professor, Portland State University (www.pdx.edu), Portland, OR 97207, 503/725-4769, leeb@sba.pdx.edu

83rd Annual International Conference Proceedings - 1998 

Abstract. One of the ongoing difficulties in managing the purchasing function is determining how to measure performance. How is quality purchasing defined? What are the key measurements for purchasing customers? How do we build performance measures that encourage individuals to accomplish organizational goals? This paper will address these issues.

Introduction. Purchasing performance has traditionally centered on prices paid and cost savings/ avoidance/reductions [Raedels and Buddress, p. 62 ;Fearon and Bales, p. 33]. While important, these measures may be counterproductive to the organization in today's environment. A recently published study by the Center for Advanced Purchasing Studies (CAPS) by Fearon and Bales, clearly indicates the measures looked at by CEOs/Presidents are significantly different from those used by CPOs. Table 1 shows the five most-needed measures by CEOs and how their rankings compared with those of CPOs. The CEOs/Presidents identified 19 measures while the CPOs identified 90 measures. It is clear from the difference in rankings in Table 1, purchasing managers and top management are not in agreement about what is important.

This paper will review why many purchasing performance measures fail, the desired attributes of a performance measurement system, how to develop appropriate performance measures, development of positive measures, and recommend some measures to consider.

Why Traditional Measures Don't Work. Traditional measures for evaluating purchasing performance include:

• Price reduction
• Cost avoidance
• Number of P.O.s issued
• Number of line items purchased
• Inventory value
• Inventory turns
• Number of past due orders
• Standard cost variance
• Department budget vs. actual
• Purchasing headcount
• Number of shipments rejected
• Number of work stoppages due to lack of material

There are several common problems with traditional measures and measurement systems. First, most measurement goals are established on a yearly basis which can lead to stagnation in the continuous improvement process. Measurements must be dynamic to reflect the environment in which the organization competes. Second, many of these measures, such as number of P.O.s issued and number of line items purchased are busywork and do not lead to process improvement. Third, they may produce conflicting results because they aren't consistent across the organization. Fourth, measures such as cost avoidance and cost savings are self-measured and self-reported which undermines their credibility. Fifth, most traditional measures are tactical, not strategic [Harding, p. 2].

Desired Measurement System Attributes. There are several ways to classify performance measures. One approach is whether the focus of the measure is to monitor the results of the process or to diagnose problems in a process. Monitoring measures are permanent. They can be used to monitor the process outcomes as well as to monitor the process itself. Diagnostic measures are used to troubleshoot a process. They are often temporary in nature and are no longer used once the problem is solved.

An alternate classification is whether to use financial or nonfinancial measures. Financial measures are less effective as the market environment becomes more dynamic, the internal processes become more integrated, and the level performance being measured becomes more operational. With nonfinancial measures, the focus needs to be on customer needs and expectations.

The ideal measurement system should:

• Support the business's operating goals, objectives, critical success factors and programs;
• Provide as simple a set of measures as possible;
• Reveal how effectively customers' needs and expectations are satisfied;
• Allow members of each organizational component to understand how their decisions and activities affect the entire business;
• Support organizational learning and continuous improvement; and
• Provide congruency of measures across organizational levels [Dixon, Nanni, and Vollman, p.165].

Measures should be action-oriented and timely. At the lowest level of the organization, measures should lead to immediate, operational solutions. At the middle-management level, measures should invoke changes in operational procedures or focus. For top management, measures should indicate changes in choice of strategies to meet goals.

Developing Strategic Purchasing Measures. The outcome of the CAPS research on purchasing performance measures indicated that management desires to see measures that look at the quality of performance and how they change over time [Fearon and Bales, p 10]. Fearon and Bales also recommend that purchasing should check with senor management to determine what specific measures are needed, how frequently management desires to see the information, and how the information should be presented [Fearon and Bales, p. 11].

The following seven step process is suggested for developing relevant purchasing performance measures.

1. What is the corporate strategy?
   In order to be relevant, purchasing performance measures must reinforce buyer behavior which supports the organization's goals. For example, If the corporate strategy revolves aound reducing time-to-market, a purchasing strategy which focused on lowest price no matter the lead time could be counterproductive. A more appropriate strategy might involve supply base reduction and early supplier involvement.
2. How does supply management relate to the organization's strategy?
   What does purchasing have to do well for the organization to succeed? It is extremely important the data be collected to determine how well we are doing in those areas which are important. The areas of greatest divergence between performance and goals are then identified.
3. Review present practice in divergent areas.
   What are the present performance measures, if any? If the areas of divergent performance are measured, why are the measures ineffective?
4. Develop performance measures for divergent areas.
   Focus on outcomes, customer satisfaction and process, not just financial measures. The buyers and users should work together to devise appropriate measures.
5. Track performance against new measures, adjust if necessary.
   Are the desired outcomes being achieved? If not the measure will need to be changed.
6. Review and if necessary, revise, measures which show nondivergent results.
7. Review regularly.

Accentuate the Positive. It is important that performance measures be expressed in a positive light. For example, the football coach who told his players not to fumble found that the frequency of fumbles was increasing. The trend was reversed when he had them focus on holding onto the ball. Thus it would be better to measure percentage of deliveries received on-time rather than the percentage of late deliveries.

Appropriate Purchasing Performance Measures. Based on the CAPS study by Fearon and Bales, the top five categories of measurements are quality, supplier problem notification, supplier delivery performance, internal customer satisfaction, and purchase inventory dollars. Table 2 presents some potential measures for each catagory.

Table 2 - Potential Purchasing Performance Measures

Quality

• Percent of items defective by supplier
• Cost of incoming inspection

Supplier Problems

• Ratio of number of line items back ordered to the number of line items ordered by supplier
• Percent of suppliers certified

Supplier Delivery Performance

• Percent of line items received on due date
• Number of stoppages or unplanned change-overs caused by quality or delivery problems

Internal Customer Satisfaction

• Results of customer satisfaction surveys
• Number of line items returned for credit
• Total time from requisition to availability for use by item

Purchase Inventory Dollars

• Total installed cost of items purchased

Summary. In order for purchasing to be considered a key component in the organization's strategy, it must develop performance measures which are consistent with helping the organization achieve its objectives. There is no uniform set of measures which will meet everyone's needs. Each organization must develop its own set of measures unique to its particular situation.

References

1. Dixon, J. Robb, Nanni, Alfred J., and Vollman, Thomas E. The New Performance Challenge. Homewood, IL: Dow Jones-Irwin, 1990.
2. Fearon, Harold E. and Bales, William A., Measures of Purchasing Effectiveness, Tempe, AZ: Center for Advanced Purchasing Studies, 1997.
3. Harding, Michael., "Purchasing Performance Measures on the Leading Edge," NAPM InfoEdge, Vol. 2 No. 5, January 1997.
4. Raedels, Alan and Buddress, Leland, "A Preliminary Comparison of Purchasing Performance Measures with Customer and Supplier Performance Measures," Developments in Purchasing and Materials Management, Proceedings of the 1993 National Association of Purchasing Management Annual Academic Conference, National Association of Purchasing Management, March 1993, pp. 58-63.

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