Purchasing Managers who speak to me about measuring purchasing performance often tear their hair out: purchasing savings are disputed because they are often not reflected in the EBITDA, the company Management doesn’t understand most of the indicators used, buyers are reluctant to write reports that eat up their time and which ultimately are of little help in performing their tasks. And yet, the knots are easy to remove providing you take the time to deal with each separately.
Let’s start with a simple question: What do you hope to achieve by measuring purchasing performance? And more precisely: For whom is the information?
By and large, I see two main objectives: steering Purchasing on the one hand with the main interested party being the Purchasing Director, and reporting the value created by Purchasing on the other, which the company or the BU’s management should be requesting.
What indicators should be used for the second case?
Briefly, those that most closely reflect the company’s strategy.
What is the use, for example, of struggling to calculate to within one euro and proudly present purchasing savings in a company for which technological innovation is the strategic driving force? In this case, it would be better to measure the number of co-developments with suppliers and their impact on the business. If reducing purchasing costs is central to the Activity’s role, then the aim will be to track savings that can be clearly reflected in the EBITDA. Unless you have at your disposal an army of dedicated Controllers, make sure you focus on the main factors.
With regard to steering, we tend rather to measure buyer performance: in this case, everything is possible and, to a certain extent, easier. The aim will be to quantify the targets set for buyers. They may be result targets (savings, quality or lowering the WCR), or purchasing process targets (tool usage rates, supplier panel renewal rate, sourcing in low cost countries, etc.). As a steering indicator, calculating savings is unrelated to EBITDA: Capex savings, for example are fully taken into account as are the costs avoided (providing they can be proven).
Voilà. I hope that the above will save a few strands of hair.
Now, how do you build management charts from purchasing performance measurements? That’s a whole other subject.
