Every Organization aspiring to improve its performance in many spears of functionalities. Procurement being a major area of spend, its performance is significantly attribute to the overall performance of the organization. Procurement needs to demonstrate value delivery to the organization. Procurement Performance Management, or PPM, refers to the holistic process of Measuring, Standardizing or Indexing, Managing and Initiating steps to increasing the added value of the procurement department.
Procurement Performance Measurement is closely related to spend management or it is an integral component of procurement management. It describes key indicators, methods, and processes that are necessary for measuring procurement success.
Monitoring procurement system performance provides managers with the information they need to evaluate how well the system is functioning and to identify areas where additional measures may be required to improve the overall procurement performance. To effectively monitor procurement performance, appropriate performance monitoring indicators must be in place and they must be supported by both management and operational personnel.
In doing so, the process is observed from the finding of savings potentials via modern methods of spend management and their realization through procurement initiatives to the final measurement of success and for sustainable management over the course of several years. Examples of different measuring techniques:
> Procurement Balanced Scorecard
> Industry Benchmarking
> Integration Savings Scorecard
In this article we shall discuss here some of the Procurement Performance Indicators through a well-established approach of Balanced Scorecard. However before moving to Balanced Scorecard Method, we should understand and abide by Fundamental Principles of Procurement and in no way we should cross the lines simply for shake of improving the Performance.
Guiding Principles of Procurement Policy:
Procurement Operations shall be carried out in accordance with the organization’s basic Procurement Principles. Some of these are shown in the table below:
These guiding principles provide basis for developing procurement strategies and practices.
Balanced Scorecard Approach
A balanced scorecard is a performance metric used in strategic management to identify and improve various internal functions of a business and their resulting external outcomes. The balanced scorecard was first introduced by accounting academic Dr. Robert Kaplan and business executive and theorist Dr. David Norton. It was first published in 1992 in a Harvard Business Review article. Dr. Kaplan and Dr. Norton took previous metric performance measures and adapted them to include nonfinancial information.
A balanced scorecard is a strategic planning and management system used to align a business’s activities with the vision statement. It aims to translate some of the ambiguous aspirations included in the organizations vision or mission statement into the practicalities of how to manage the business better.
The balanced scorecard is used to reinforce good behaviors in an organization by isolating four separate areas that need to be analyzed. These four areas, also called legs, involve
> Business Processes,
> Learning and Growth,
The balanced scorecard is used to attain objectives, measurements, initiatives and goals that result from these four primary functions of a business. Companies can easily identify factors hindering company performance and outline strategic changes tracked by future scorecards. With the balanced scorecard, they look at the company as a whole when viewing company objectives. An organization may use the balanced scorecard to implement strategy mapping to see where value is added within an organization. A company also utilizes the balanced scorecard to develop strategic initiatives and strategy objectives.
Balanced Scorecard Approach to Procurement Performance:
The Balanced Scorecard is a performance measurement framework that adds strategic non-financial performance measures to traditional financial metrics and provides a more ‘balanced’ view of organizational performance. On the procurement side, here’s a macro approach to deploying a balanced scorecard as shown below:
Deploying this approach shifts organizational focus (resources, processes, systems) towards activities that truly have an impact. The scorecard helps steer the ship in the right direction. Some metrics to consider as part of the Procurement Balanced Scorecard are shown below:
These indices may be classified into three groups of measurable deliverables that have Value Proposition to Customers viz
Indices under these broad categories integrates all others three perspectives of Balanced Scorecard, that are Finance, Business Processes and Learning & Growth. Improvements in all the four key Balanced Scorecard areas ultimately lead to improvements in Quality, Delivery & Cost (QDC). For example, any business process improvements may result in improvements in Quality or Delivery or Cost, these improvements in turn may positively impact finance and lead to customer satisfaction bringing in organizational growth.
QDC (Quality, Delivery & Cost) Performance Indices :
A performance index is a single measure of a system’s performance that emphasizes those characteristics of the response that are deemed to be important. Performance indices are derived based on the trade-off between a constraint and the free variable. Performance Index is a measurable value that demonstrates how effectively a company or functional department is achieving key business objectives. Accordingly, there are three broad categories of indices.
> Quality Performance Indices (QPIs)
> Delivery Performance Indices (DPIs)
> Cost Performance Indices (CPIs)
Some of the major Performance Indices for each of the QCD are depicted below.
Quality Performance Indices (QPIs):
These indices identify performance of goods or services using certain attributes to improving level of quality.
Delivery Performance Indices (DPIs):
Delivery performance provides an indication of how successful the supply base is at providing products and services to the concerned stakeholders. These metrics are most important in the measurement of performance of the procurement function.
Cost Performance Indices (CPIs):
These are measures of the efficiency of expenses spent and also effectiveness of the procurement function on cost related aspects like actual cost spend and savings etc.
These indices also serve as KPIs (Key Performance Indicators) to gauge performance of Procurement personnel. Procurement KPIs are management tools designed to monitor procurement department performance and help meet goals, strategies and objectives. The primary goal of every procurement organization is keeping the procurement sustainable and constantly looking for ways on how to improve the procurement processes and performance. Some of these Indices may be used by procurement functions by suitably modified as per the individual organizational requirements.
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