Tag Archives: procurement KPIs

2016 Rewind – Procurement KPIs – Measuring the Unmeasurable

Our final rewind article for 2016 is on one of the hot topics of the year – procurement KPIs. More specifically, how do you go about measuring the unmeasurable? 

Procurement KPIs

Is it time to develop new procurement KPIs? As the profession delivers more value, we need to consider measuring the ‘unmeasurable’.

How on earth do you put a KPI against innovation in procurement? How about risk management? Or talent? It’s time for the profession to come together and quantify the value we deliver beyond cost savings.

For me, a revelation that came out of the discussion at The Beyond Group’s “Productivity in Pharma” (PiP) Think Tank in Basel last month, was that there is an urgent need to create procurement KPIs that fully reflect the broader value our profession delivers.

Unfortunately, we will never escape the requirement to track savings (and nor should we; we’re good at it!), but it’s time to define the value-addition areas of what we deliver – productivity, innovation and risk management – in hard dollar terms so that we can quantify our value delivery in these areas.

In my previous post, I shared five rules of thumb for good procurement KPIs. To recap, each KPI should be:

  • clearly linked to an overall business objective,
  • uncomplicated and measurable in hard-dollar terms,
  • based on outcomes, not inputs,
  • not too long nor too many (five to six KPIs at a maximum),
  • achievable and inspirational.

Taking these rules as a starting point, let’s look at five value-addition areas that every procurement professional should be measured against:

  1. Productivity

I know there are a lot of CPOs out there who are tired of the old ‘cost savings’ metric.  And I understand it. But the reality is that cost savings is at least ONE thing that clearly defines our contribution. If we walk away from this, then we have lost an important anchor.

However, we do need to ensure that the broader business audience understands procurement is about so much more than savings, and that we can clearly define value in other areas as well.

One important point I would make (an opinion also shared by ISM CEO Tom Derry at the Procurious Big Ideas Summit) is around cost avoidance. Don’t insult yourself, or your CFO, by reporting on this metric. Costs that have been avoided simply don’t count.

  1. Efficiency

There are so many ways CPOs can deliver efficiency gains that result in bottom-line value for their organisations. In the pharmaceutical world, I imagine this would be measured in terms of speed to market (or “speed to patient”, as one clever pharma Procurement Head put it), faster clinical trials or even the good old basics like reducing inventory.

There are so many ways that procurement can free up cash in the business, but the hard dollar value of this needs to be quantified – which is not impossible.

Business cases are always based on the time value of money. Net Present Value (NPV) is a fundamental financial measurement for businesses. So, before you embark on one of these efficiency projects, work with your finance team to agree on a calculation for the hard dollar value of the efficiency gain, then deliver it, and stick to the agreed value!

  1. Innovation

Procurement rock-star and former CPO of Deutsche Telecom, Eva Wimmers, talked last year about incentivising procurement-driven innovation by creating a suite of relevant KPIs, including cost and time savings achieved as a direct result of innovative improvements.

Innovation KPIs can be process-centric, behavioural or customer-focused (such as service and net promoter scores). What’s important is that every KPI is measurable in its own right and clearly connected to overall corporate objectives. 

  1. Risk management

This is a powerful measurement that will capture the attention of your CEO and other executives. You see, the challenge with risk management (like safety) is that the ultimate success is when nothing goes wrong!

Procurement and other parts of the organisation can spend a lot of time and energy securing supply relationships and carefully managing contingencies, which result in absolutely nothing happening (which is a good thing!). At the C-level it is, therefore, quite easy to take risk management for granted and be tempted to reduce funding and resources in this area.

Actually, safety is a very powerful metaphor for the role procurement plays in managing risk. Nothing captures an executive’s interest more than safety. The language and methodology of safety measurement is well known to executives, most of whom are rewarded on safety metrics.

So, rather than re-invent the wheel with a whole new set of measurements around risk, simply reframe risk in a safety context.  Work with your safety department to understand their metrics, explain what you are measuring and get their advice on how they would construct metrics for risk management in procurement.

When ‘selling in’ your risk management KPI to senior management, don’t underestimate the power of good storytelling. It is critical to illustrate your business case with rich examples of how much market share and stock market value has been lost by competitors and peers when supply chain risk is not properly managed.

Disaster Protection

Traditionally, we have valued this in terms of potential legal costs, but today it is so much more than that. Social media now ensures that your end customers (and the press) quickly become aware of supply chain issues, and these are amplified to such a point that they result in loss of market share and ultimately share price value.

Supply chain disruptions can have catastrophic impacts on corporate brand and equity value. Procurement, however, can play a huge part in protecting the company from this type of disaster, and I believe this is one of the most valuable roles we can play today. Risk management must therefore be highlighted and reported upon in our procurement KPIs.

As you will see at the close of this story, my bold recommended KPI for risk management is number of days supply chain disruption reported in media (with the objective of keeping this at zero!).

As a side point, research in the US has shown that companies who have invested in appropriate social procurement (projects that aligned and complement your brand) will bounce back faster after a market ‘shock’ event.

  1. People

Call people what you will – ‘assets’, ‘human capital’, or even ‘resources’ – but I prefer to use the word ‘talent’. People are frequently regarded as an enabler metric, but I think it should be much more than that.

We should position procurement as a source of leadership talent for the business. Particularly if we believe what we say (and I do!) that procurement provides some of the best commercial training of any function.

Procurement offers its team members the opportunity to work across the business internally, as well as externally. So let’s put our money (and our KPIs) where our mouth is! Develop a metric that measures procurement’s contribution to developing leadership talent. Once again, this is something to which senior leadership is very committed in the best organisations. 

So, to be provocative – here are six procurement KPIs that I would put forward as a CPO today:

  1. Cost savings – $ saved in financial year
  2. Productivity – $ released through working capital initiatives
  3. Innovation – Projected $ value delivered through procurement-negotiated supplier-led innovation.
  4. Risk management: Number of days supply chain disruption reported in media.
  5. Talent: Number of employees who have worked in procurement and are now on the enterprise leadership development program.

Procurement KPIs are a hot topic for everyone, and I’m sure you won’t agree with all my points. So…what are your thoughts?

Has Procurement Got Its KPIs Right?

As the Procurement function evolves, its KPIs remain old-fashioned. Bertrand Maltaverne explores the surprising results of a Procurement KPI survey.

Procurement KPIs

In a rather interesting coincidence, just as ProcureCon Europe was releasing a benchmarking paper called Procurement Challenges, we released a white paper that also focuses on one of the most fascinating challenges in the industry: The Direct Material Procurement Challenge.

More than a coincidence, this is a sign of the times as the role of Procurement and its position in organisations rapidly becomes quite a recurring hot topic.

Before going into the specifics of ProcureCon’s report, the challenges that Procurement faces stem almost entirely from the transformation Procurement  is going through as a function.

Value vs. Cost reductions

“As businesses emerge from the recent recession into a fragmented supplier ecosystem, a normal approach to creating value through cost saving alone is no longer relevant.”

ProcureCon’s report is not the only one to highlight the current gap between a value-­based Procurement approach and the actual KPIs that most organisations track, specifically:

  • 91 per cent of surveyed organisations have cost savings as a KPI;
  • 76 per cent have cost avoidance as a KPI.

KPIs for value metrics like quality, risk, and cycle times languish respectively in 5th, 8th, and 12th place! Fewer than 50 per cent of companies track these measures.

More troubling: only 30 per cent track Procurement ROI as a KPI. ROI (Return On Investment) or VFM (Value For Money) is actually the main KPI that all organisations should aim for as it synthesises the ratio between value generated and energy or resources employed. Or, in other words, a measure of the effectiveness and efficiency of a Procurement organisation.

Supplier Management Core Procurement Activity

Among the many interesting insights in the report, there are two aspects related to supplier management and stakeholder management that are kind of interesting. They both relate to the qualification of suppliers and are quite revealing.

Procurement still operates too much in a silo

“Procurement typically take the lead when it comes to the qualification of contractors and suppliers during the bid process.”

Decisions regarding sourcing have to be cross-­functional. Not only to ensure that all aspects have been looked at but mostly to ensure adoption of the decisions. Involving other departments in the decision-­making process is critical.

Even better, involving them in the early stage of defining a category’s strategy is vital to define the value that they expect suppliers to deliver. This may not be low prices alone.

Procurement still sees suppliers as trading partners, not business partners

There are also a couple of surprises when it comes to the dimensions Procurement looks at when assessing new potential suppliers. We assume this also reflects the KPIs tracked afterward.

Not surprisingly, financial stability comes first. As a former purchaser, I can say this fits with the practices I have seen on the field. This is not without inherent risk: “conducting a single financial stability check (e.g. D&B check) before engaging a supplier could provide a false sense of assurance.”

More surprisingly, CSR-­related themes like sustainability and safety stand squarely in the middle of the list. Around 50-60 per cent of respondents say they include these factors in their assessments. A notable exception is diversity, which comes last on the list with only 20 per cent of respondents taking this into account.

Issue of Supplier Innovation

But, very surprisingly, competent advice is a criterion that is at the bottom of the list, covered by only 29 per cent of respondents. This is especially surprising considering the focus on the role of Procurement in organisations, and its impact on innovation. The lack of attention on this area is rather troubling.

As we understand it, if organisations do not measure if suppliers could be a source of new ideas and suggestions, it means that they do not expect suppliers to be able to participate in their innovation process. This quite a self­-centred view of innovation!

In conclusion, there seems to be a consensus within the Procurement community that Procurement is not in the place it deserves to be, and that, in the future, its importance will grow. For example, ProcureCon’s report says that 62 per cent of respondents to their survey estimate that Procurement will move towards making board-level decisions in the next 3 years.

But, as far as their report and many others show, there is still a gap in capabilities and delivery that needs to be bridged before we get there.

Now is the time for Procurement to evolve!

Less is More – The Power of a Good KPI

It is not every day that procurement can learn from a fashion icon, but in my (and Coco Chanel’s) view – “less is definitely more” when it comes to a good KPI for procurement.

Coco Chanel - Good KPI

Think about your role in procurement. Think about the huge number of outcomes you work hard to deliver every day, from the repetitive (but necessary) daily tasks, to the huge projects with looming deadlines. Now, I want you to distil your entire, complex, multi-faceted role into just five KPIs.

That’s right – five KPIs only.

Passion for KPIs

I didn’t realise how passionate I was about KPIs until the conversation came up on the agenda at The Beyond Group’s “Productivity in Pharma” (PiP) Think Tank in Basel last month.

The room was full of heavy-hitters from the big pharmaceutical houses, including Novartis, Roche and Bristol Myers Squibb. Not necessarily CPOs, but heads of indirects, clinical research and engineering procurement. The facilitator, Sammy Rashed, led a spirited debate on what a good KPI should look like, how KPIs should work, and how they can benefit a business.

Wow! As the conversation evolved, I realised I had some strong views on how my beloved profession should be measured.

I shouldn’t have been surprised. Just after I finished my MBA, I spent a couple of years working with Alcoa’s corporate finance team on how we should measure procurement’s value, and then educating the procurement team globally about how to report the calculations. I’m also married to the global CFO of a FTSE 10 company, so I know the kind of metrics that he deems as solid, and those that are “fluff”.

What Gets Measured…

On that point, let me tell you a little bit about what I know about the mind of a Finance Director. It goes without saying that they are absolute geniuses: kind, considerate, and definitely make the very best life partners.

BUT, as I am sure you have witnessed in your own organisations, the mind of a CFO is fairly mono-dimensional. Value has to be defined and quantified in hard terms.

I put in a quick trans-Atlantic call to my husband to ask his opinion on KPIs, and was rewarded with this gem: “You can’t improve what you can’t measure”. It’s actually a variation on a common saying of his, which is “what gets measured, gets done” – but there you go. CFOs are full of surprises.

KPIs can be lagging, leading, soft, or hard – but whatever you do (according to this CFO) they must be linked to the corporate objectives, which is where I will start with my five rules of thumb for a good KPI.

1. Each KPI needs to be clearly linked to an overall business objective.

This is one of the most important issues for procurement to consider. You see, if procurement KPIs aren’t linked to the business strategy, then your team’s activities will not be seen as relevant to getting the business to where it wants to go.

I think this is why I get fired up on this topic. We talk about a ‘seat at the table’ and ‘speaking the language of the business’ – well, in the c-suite, KPIs are the language of the business. As a procurement professional, the KPIs you choose actually define your role in the business. Don’t underestimate the power of a good KPI to secure your seat at the table.

We were all in agreement at the PiP Think Tank that for procurement to be relevant and valued, it must be aligned with the business strategy. Your KPIs are the ultimate reinforcement to senior management that your team “get it” and understand how they can contribute to the overall business success.

KPIs that deliver profit (through cost-downs), free up cash, contribute to top-line growth through innovation and protect the corporate reputation will resonate strongly with your senior leadership team.

There is another important reason for linking your KPIs to the corporate objectives. Shared objectives help create teamwork and a sense of connection for everybody and the greater organisation.

2. Your KPIs need to be uncomplicated and measurable (ideally in hard dollar terms)

Procurement receives a lot of “constructive feedback” (I’m trying to be positive here) for using too many unique terms and not speaking the language of the business. Make sure your KPIs can’t be criticised for the same reasons!

A good KPI can be measured relatively easily and understood by the business. There’s no problem with spending some time with Finance to make sure you are a little creative in defining how value is being delivered, but the end result must be something that is widely understood and helps build credibility rather than undermine it.

You will also open yourself up to criticism if your team, or other parts of the business, need to spend a lot of time on calculating KPIs, so be careful and keep it simple.

3. KPIs should measure outcomes, not inputs or internal processes

Number of meetings, number of ideas, strategies being developed – none of these count in my book. They are all measurements of the inputs your team will make with the objective of achieving an outcome.

Your KPIs should capture the value this type of activity will actually deliver to the business. They have to resonate with the senior level by measuring outcomes rather than cataloguing your own activity.

4. Don’t have too many KPIs

Going back to what I said at the beginning, this should be a maximum of 5 KPIs. It takes courage, real discipline (and a lot of debate), but try to get your KPIs down to a small handful of measurable outcomes. It will give everyone clarity and focus.

5. KPIs must be achievable

More than anything, your team will need to believe that they can actually deliver on their KPIs. In a way, they need to be inspirational. They should engage the team to focus on the results that will make their function truly valued!

What is your criteria for a good KPI?

The Productivity in Pharma Think Tank brings together a conclave of senior procurement leaders from the Pharmaceutical industry, creating a unique, mini-MBA style environment, where the most pressing issues facing the function are explored in detail and, from which, key insights and applicable takeaways are derived.

You can find out more about this event at The Beyond Group website, and connect with the event hosts and facilitators Giles Breault (@GilesBreault) and Sammy Rashed (@RashedSammy) on social media.