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New Age Procurement Metrics for the CPO’s Dashboard

Back in the late 1980s, there was considerable debate among procurement leaders as to how to measure procurement's functional performance. Procurement traditionally was seen as a service function — one that processes transactions, manages bidding, and negotiates prices and commercial terms with suppliers — but not really one that makes significant contributions to business performance or market competitiveness. As a consequence, key measures of procurement performance were improvements on metrics such as cost to issue a PO and purchase price variance (PPV).

However, a small cadre of groundbreaking procurement leaders looking to elevate the procurement function to be a strategic contributor to business and competitiveness saw such metrics as very dangerous. They institutionalized and perpetuated the notion of procurement as overhead — a necessary cost of doing business that needed to be burdened across business-unit P&Ls.

The huge challenge at the time was not only defining better, more strategically focused performance metrics for procurement, but also assembling and synthesizing the data needed to produce accurate, consistent, and valid metrics that could be deployed — via team and personal objective setting, job performance reviews, salary, and other incentive processes — to drive different, more strategically motivated behaviors among procurement personnel. Unfortunately, the required sophisticated data collection, aggregation, integration, synthesis, and capabilities simply did not exist.

The age of big data
Fast-forward three decades to the new age of big data. Despite having imperfect metrics for procurement performance, those groundbreaking business leaders have largely succeeded in their quest to transform the procurement function. Their success stories have gone viral. It is now a rare thing to encounter a major global corporation, or even a midsized or smaller one, that operates without some form of chief procurement officer (CPO) who is in charge of orchestrating strategic and competitive sourcing, procurement, supply, and risk management activities at an enterprise level.

The evolution and proliferation of information and automation technology for sourcing, procurement, and supply management — and, more importantly, the ability of that technology to integrate with operational, financial, human resources, and other corporate information infrastructures — have enabled a huge leap forward in the possibilities for designing and deploying strategic procurement performance metrics.

In fact, procurement leaders now face almost the opposite challenge from what their forebears faced in the late 1980s. The age of big data — in which powerful analytical tools enable minute and granular analysis — makes it very easy to measure many aspects of organizational performance. At the same time, however, it makes it very easy to lose sight of the important metrics that truly drive the desired competitive thinking and behaviors of strategic procurement teams. Too many metrics confuse an organization and can often place people and various functions at cross-purposes.

There are a fewer than a dozen metrics that should be on every CPO's performance dashboard. A recent whitepaper titled Analyze This: Top 10 Metrics to Strengthen Organizational Procurement Practices (registration required) offers a list of specific metrics, as well as how to calculate, interpret, and report on them.

What metrics is your organization using today? Where would you like to see it evolve?

8 comments on “New Age Procurement Metrics for the CPO’s Dashboard

  1. Eldredge
    September 25, 2014

    Procurement traditionally was seen as a service function — one that processes transactions, manages bidding, and negotiates prices and commercial terms with suppliers — but not really one that makes significant contributions to business performance or market competitiveness.


    Wow – hard to believe that is still the perception of procurement. It seems to me that procurement should be seen as a strategic component of the organization.

     

  2. Hailey Lynne McKeefry
    September 25, 2014

    @Eldredge, I believe that leading organizations are seeing procurement as more than a cost center. We have come a long way.

  3. Taimoor Zubar
    September 28, 2014

     

    “What metrics is your organization using today? Where would you like to see it evolve?”

    Like most organizations, the key metric to evaluate the performance of the procurement team is the average lead time it takes for them to fulfill a request. That, however, isn't something I totally agree with. I think the procurement team needs to be more customer driven and the true metric for evaluating performance should be the level of customer satisfaction. Anything else doesn't really indicate actual performance.

     

  4. Taimoor Zubar
    September 28, 2014

    “It seems to me that procurement should be seen as a strategic component of the organization.”

    @Eldredge: I think the main reason why procurement isn't looked at as a strategic function is because it is considered to be playing a support role instead of being part of the mainstream value chain. The moment companies start considering it as part of their supply chain and integrate operations with the rest of the value chain, you will see more importance being given to the procurement team.

  5. Eldredge
    September 28, 2014

    @TaimoorZ – You're right. Those organizations that take a more strategic approach to their procurement function will garner an advantage.

  6. Houngbo_Hospice
    September 28, 2014

    @Eldredge: Who is the key human resource that should be in charge of the organization's procurement strategy? How is that strategy's performance evaluated?

  7. Eldredge
    September 29, 2014

    @Hospice – It seems like it would need to be the finance organization, but with very close collaboration with engineering.

  8. ahdand
    September 30, 2014

    @eldridge: Yes you have to have a close relationship with the engineers. Anyway it wont be an easy task at all. 

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