M12 Measuring Evaluating Performance Coursebook ENG Sept 2010 220 Pages

MEASURING AND EVALUATING
PERFORMANCE
MODULAR LEARNING SYSTEM IN

SUPPLY CHAIN MANAGEMENT
COURSEBOOK
MODULE 12
Module 12
Measuring and Evaluating

Performance
Coursebook
International Trade Centre (ITC)
Acknowledgements
The original version of this Module was produced by ITC in cooperation with the Chartered Institute of
Purchasing & Supply and Achilles Management Consulting Ltd. It has since been updated by ITC.
It was conceived, written and developed by a team of private consultants and ITC staff made up of the
following persons:
♦ Written by: Geoff Crouch (Achilles), Ken Feasey (Achilles) ♦ Selected inputs, review & finalization: Ian
Sayers, Margareta Funder, Roberto Smith-Gillespie
(ITC) ♦ Assistance in design & layout: Marie-Thérèse Renault Horvat (ITC), John Nganga (intern ITC)
Note to users
The International Trade Centre (ITC) is the focal point institution in the United Nations system for technical
cooperation in trade promotion and development. One of ITC’s key programmes focuses on developing high
quality training materials and related tools and services in the area of supply chain management (SCM ®).
ITC’s Modular Learning System (MLS) was developed to promote the concept of practical, comprehensive and
user-friendly training in this area world wide.
This Module is part of a series of modules which enable you to obtain a professional certificate or diploma in
Supply Chain Management® supported by ITC and recognised by a global network of high quality training
providers. For a full list of all recognised institutions in this network, please visit our website.
The Module and its contents are intended to be used for training and illustrative purposes only, and not as a
guide to good or bad management practice applicable to every specific situation. The knowledge and skills
presented in this Module must therefore be adapted to the reader’s particular context.
Every effort has been made to verify the sources used in this training material and to acknowledge their
contribution. The specialists that have written the texts have drawn from their experience and from the learning
gained from respected works used in their personal development. As it would be impossible to acknowledge
each of these works separately, the authors have compiled a bibliography of recommended further reading
that is being regularly updated and posted on our website (http://www.ipscm-learningnet.net).
The designations employed and the presentation of material in this Module do not imply the expression of any
opinion whatsoever on the part of ITC concerning the legal status of any country, territory, city or area or its
authorities, or concerning the delimitation of its frontiers or boundaries. All graphic images used in this Module
are the property of ITC.
This Module may only be used within the context of an agreement with ITC.
© International Trade Centre (ITC)2000
Ed. 2006 / Print. Sept. 2010

MLS International Trade Centre
Contents
Page
Preface
Introduction Unit 1
♦ 1.1 Why evaluate performance? .......................................................................... .1 ♦ 1.2 What makes a good
evaluation system? ........................................................ 3 ♦ 1.3 The behavioural impact of evaluating
performance ....................................... 5 ♦ 1.4 Overview of the
module .................................................................................. 8
The Performance Evaluation Process & Model Framework Unit 2
♦ 2.1 Managing the process of performance evaluation ..................................... ...9 ♦ 2.2 Purchasing & supply
objectives .................................................................... 12 ♦ 2.3 The scope of the
evaluation ......................................................................... 14 ♦ 2.4 The purchasing & supply performance
management model ........................ 24 ♦ 2.5 Performance related to
outcomes ................................................................ 27 ♦ 2.6 Performance related to internal
factors ........................................................ 54 ♦ 2.7 Performance related to external
factors ....................................................... 69 ♦ 2.8 Conclusion...and refocusing on
suppliers .................................................... 79
Performance Measures and Targets
Unit 3
♦ 3.1 Introduction .................................................................................................. .83 ♦ 3.2 More on
measures ....................................................................................... .86 ♦ 3.3 Targeting
targets........................................................................................... 92 ♦ 3.4 More examples of measures &
targets ....................................................... 102 ♦ 3.5 Evaluating supplier
performance ............................................................... .146
Implementing the Evaluation
Unit 4
♦ 4.1 Introduction ................................................................................................ .157 ♦ 4.2 Collecting the
measurement data ............................................................... 158 ♦ 4.3 Analysing and interpreting the
data ............................................................ 168 ♦ 4.4 Communicating and obtaining feedback on
the performance evaluation ..................................................................... 177 ♦ 4.5
Conclusion .................................................................................................. 179
Performance evaluation of integrated Supply Chain Management
Unit 5
♦ 5.1 Complexity of supply chain performance measurement ........................... 181 ♦ 5.2 The need for a
performance measurement system in SCM ..................... 183 ♦ 5.3 Guidelines for developing a supply chain
performance evaluation system186 ♦ 5.4 SCM performance evaluation
process ...................................................... 189 ♦ 5.5 Models of SCM performance
evaluation ................................................... 193 ♦ 5.6
Conclusion............................................................................... 210
Module 12: Contents i
International MLS Trade Centre
ii Module 12: Contents
MLS
International Trade Centre
Figures
Page
Preface
Unit 1 corporate level outcomes ...................................................

covered when evaluating performance in
relation to function-level outcomes .................................
1.1-1 The elements of performance evaluation ..................................................... 2
ownership ................................................................
specific elements to be evaluated .........................
Unit 2 departments ................................................
ation Process & Model Framework customers ................................................................
between purchasing & supply and
2.1-1 The performance evaluation process ......................................................... 10 2.2-1
other departments ...........................................................
Corporate strategy: the key dimensions .....................................................
positioning model: 4 types 12 2.2-2of purchase items .........
Examples of purchasing & supply objectives ............................................. 13 2.3-1
processes ................................................................
Purchasing & supply & its customers .........................................................
staff performance 15 2.3-2................................
Customer segmentation ............................................................................. 16 2.3-3
factors ....................................................................
Customer Segment X ................................................................................. 16 2.3-4
buyer relationship How far
/ contract continuum ...............
along the supply chain to evaluate? ............................................. purchasing 20& 2.3-5supplyPurchase
outputs .............................
areas .......................................................................................... 22 2.3-6
performance The supply
management model ...........................
positioning model ..................................................................... 23 2.4-1 Purchasing & supply
performance management model ............................ 25 2.5-1 Illustrative examples of
possible issues to evaluate concerning Unit 3
3.2-1 If you can't measure, you can't control... .................................................. 86 3.2-2

Examples of binary measures .................................................................... 88 3.2-3
Examples of continuous measures ............................................................ 89 3.2-4
Examples of restricted choice measures ................................................... 89
Module 12: Contents iii

International MLS
Trade Centre
3.2-5 Gauging the benefits and difficulties of the measures ............................... 92 3.3-1 Targets are the
essence of improving performance .................................. 92 3.3-2 Deriving targets from the P & S
objectives ................................................. 93 3.3-3 Links in the company's supply
chain .......................................................... 99 3.5-1 Weights applied to supplier performance
factors ..................................... 147 3.5-2 Evaluating
prices ...................................................................................... 147 3.5-3 Evaluating
quality ..................................................................................... 148 3.5-4 Evaluating delivery: the basis for
calculation ........................................... 148 3.5-5 Evaluating delivery:
application ................................................................ 148 3.5-6 Evaluating
service .................................................................................... 149 3.5-7 Overall supplier
evaluation ....................................................................... 150 3.5-8 Cost-ratio method: assessing supplier quality
......................................... 151 3.5-9 Cost-ratio method: assessing supplier delivery .......................................
151 3.5-10 Cost-ratio method: assessing supplier service ........................................ 152 3.5-11 Cost ratio
method: overall assessment .................................................... 152 3.5-12 Supplier capability and
motivation ............................................................ 155 3.5-13 Overall supplier base
evaluation .............................................................. 155
Unit 4
Implementing the Evaluation 4.2-1 Requisitions log... ....................................................................................
162 4.2-2 Purchasing & supply performance evaluation planning table .................. 164 4.3-1 Structure for
presenting the performance evaluation results ................... 169 4.3-2 Flow
diagrams... ...................................................................................... 173 4.3-3 Using an X-matrix to combine
assessments & planning at various levels175 4.3-4
Graphs ...................................................................................................... 176
Performance Evaluation of Integrated Supply Chain Management Unit 5
5.3-1 Performance measurements .................................................................... 186 5.3-2 Inter-related
performance measures at strategic and operational levels . 188 5.4-1 SCM Performance Evaluation
Process .................................................... 190 5.5-1 The Performance
Prism ........................................................................... 194 5.5-2 The Balanced
Scorecard .......................................................................... 196 5.5-3 The Balanced Scorecard for supply chain
operations ............................. 197 5.5-4 Building a Supply Chain-Specific Balanced
Scorecard ............................ 199 5.5-5 Some Key Balanced Scorecard Measures for Supply Chains .................
202 5.5-6 Balanced Scorecard Framework .............................................................. 204 5.5-7 The Supply-Chain
Operations Reference (SCOR) Model ....................... 206 5.5-8 SCOR Model
levels .................................................................................. 208
iv Module 12: Contents
MLS
Preface
About the Modular Learning System in Supply Chain Management ®
The Modular Learning System (MLS) in Supply Chain Management® is a comprehensive training
pack covering the total purchasing & supply process. The ® symbol signifies the power of
purchasing which is one key element of this programme.
The MLS-SCM® consists of a series of complete and up to date training packs, each covering a
particular aspect of this process. For further information on this programme please refer to our
website http://www.ipscm-learningnet.net/index.php.
The aim of the MLS-SCM® is to promote the competitiveness of enterprises through better
purchasing & supply management. That is why we have given it the motto: Buying into
CompetitivenessTM.
The modules that make up the Modular Learning System are shown in the following figure.
Coverage: The Total Supply Chain
Module 12: Preface v
Managing the Contract & Supplier Relationships
Managing Logistics in the Supply Chain
Managing Inventory
Preparing The Contract
10
9
11
Measuring & Evaluating Performance
Negotiating
8
12
7
Understanding the Corporate Environment
Obtaining & Selecting
Offers
6
1
®
5
2
Specifying Requirements & Planning Supply
Appraising & Short-listing Suppliers
4
3
Developing Supply Strategies
Analysing Supply Markets
18 Managing Finance
along the Supply Chain
16 Customer Relationship
Management
17 Operations
Management
Micro And Small
Enter- prises
MLS
About this Module
This Module focuses on how to measure performance. This is a key area

which must not be neglected as it is the basis for continued improvement.
The Module has a dual approach in introducing this key area. The
emphasis is on measuring performance in bolt purchasing & supply at the
enterprise level and in Supply Chain Management (SCM) at the level of
all members of a supply chain.
The Module will give you practical advice on what and how to measure and
evaluate your performance. It includes various examples of specific
measurements which you could either use as shown or adapted to your
own environment.
vi Module 12: Preface
International Trade Centre MLS
Module 12: Preface vii
About this Coursebook
The Coursebook for this Module is made up of a series of Units. Each of

these includes, in addition to a written presentation of the relevant topics:
♦ Learning Objectives: the knowledge and skills you will have

acquired once you have completed the Unit.
♦ Key Points: highlights of particularly important issues.
♦ Definitions: explanations of concepts and specialised terminology

used in the text.
♦ Figures: a variety of graphical and visual presentations of concepts

and issues.
♦ Action Points: these are practical exercises and applications of

what you have learned, which you will find in the Module Workbook
which accompanies this Coursebook.
♦ Learning Checks: these are self-assessment checks at the end of

each Unit allowing you to verify your knowledge of the various concepts
that have been covered in the Coursebook. These are also available
through the Workbook.
viii Module 12: Preface
Unit 1 Introduction
The Framework & Unit Model
Process In2
Unit 3
Unit 4 Performance
Implementing Measures &
the Targets
Evaluation
Unit 5 Performance of Integrated SCM tr
Unit 1 Introduction
Learning Objectives
By the end of this Unit, you should be able to:
♦ Explain the purposes and effects of evaluating purchasing &
supply performance.
♦ Describe which are the requirements of a good purchasing &
supply performance evaluation system.
1.1 Why evaluate
1.1 Why Evaluate Performance? performance?
Evaluating performance is an essential part of 1.2 What makes a good evaluation system?
the management process. This applies to any area of management, not just purchasing &
1.3 Behavioural impact
supply or Supply Chain Management (SCM).
1.4 Overview of Module
The purpose of performance evaluation in purchasing & supply is to understand and
continuously improve the way in which the function works and the results that it achieves.
Specifically, performance evaluation helps to:
♦ Understand to what extent customers (external as well as
internal) are satisfied.
♦ Understand different factors that may be causing problems.
♦ Focus attention on priority areas when seeking solutions to
problems.
♦ Identify new approaches to improving performance.
♦ Take corrective action wherever problems exist.
♦ Improve decision-making.
♦ Develop better relationships with customers, including suppliers
and other functional areas in the company.
Module 12: Unit 1 1
International MLS
Trade Centre
♦ Identify the resources or organisational arrangements that may
be needed to improve performance.
♦ Recognise high or low performing staff and teams, and identify
needs for training and better work organisation.
♦ Motivate people to do the best possible job.
Remember:
What gets attention is taken care of. What is taken care of gets improved.
Improvement is not a time-bound project. It must be continuous, and so become routine.
Performance evaluation should also, therefore, become continuous and routine.
There are different elements involved in performance evaluation, as shown in the following
figure.
Figure 1.1-1
Sequence of cause and effect

Environment
• Internal systems & processes
Outputs
Outcomes Inputs
• People
Focus and sequence of evaluation
• Understand the impact
• Understand what works & what
• Understand & of environment and
doesn’t work
respond better to inputs
• Focus on priorities to continuously
customer needs and
• Develop strategies
improve systems, processes & people
to corporate goals & that take account of
• Use inputs more effectively
strategies their impact
• Develop better working relationships
• Influence these
• Motivate people to do the best factors where possible
possible job
Key evaluation indicators

Efficiency Effectiveness
Measure the relationship between
Measure the extent to which the the level of inputs and the outputs
outputs result in outcomes that meet achieved
the customers’ needs
❑ Sequence of cause and effect
Purchasing & supply must function within a particular environment, i.e., taking account of the
conditions in the supply markets and in the country in which it operates. This also concerns the
environment within the company of which it is part. Purchasing & supply also receives from
2 Module 12: Unit 1
1.1-1
within its company the inputs (e.g., financial and human) that it needs in order to perform its
work.
The function’s internal systems, processes and people – which are influenced by these external
factors – produce a series of outputs, for instance, a certain number of purchase orders and
amount of money spent. These outputs result in outcomes that should meet customer
requirements concerning quality, lead-times, reliability of delivery, cost savings, etc.
The cause and effect sequence of these influences is illustrated in the figure that we have just
seen.
❑ Focus and sequence of evaluation
The sequence of evaluation follows the reverse order to the cause and effect sequence. It aims
first to determine which outcomes have been achieved, and whether these have in fact met
customers’ needs and contributed to the organisation’s goals and objectives.
It then looks for the causes of these outcomes at two levels: the first level focuses on how
purchasing & supply works internally (including how it manages its suppliers), and on its people.
The second level concerns the impact of external environmental factors.
In short, performance evaluation essentially starts by looking at what was achieved, and then
tries to understand why this was achieved. The overall purpose is continuous improvement.
❑ Key evaluation indicators
Evaluation aimed at measuring effectiveness will attempt to determine the extent to which the
process outputs have resulted in outcomes that meet customer needs. In other words, it
ultimately seeks to verify whether purchasing & supply has achieved its customer-oriented
targets and its functional objectives.
Evaluation aimed at measuring efficiency will aim to establish the relationship between the input
levels that went into the process and the outputs that resulted from it. In short, it seeks to know
how productively these inputs were used in delivering the function’s work.
1.1 Why evaluate
1.2 What Makes a Good Evaluation System?
performance?
A good performance evaluation system must respond to a number of
1.2 What makes a good
requirements. It should, for instance: evaluation system?
♦ Support, and be consistent with, the company’s goals and 1.3 Behavioural impact
objectives.
♦ Specify the extent to which customers’ needs and expectations 1.4 Overview of Module
are being satisfied.
Module 12: Unit 1 3
♦ Cover all of the processes and activities for which purchasing &
supply is responsible, and not give just a partial picture.
♦ Take account of the different kinds of

purchases being carried out by the
company.
♦ Allow for management control, to

promote continuous improvement.
♦ Contribute to effective decision- making not only

at the strategic level, but also day-to-day. If it does
not provide “down to earth” operational guidance, it
will be of limited use.
♦ Take account of the external environment as well as the

environment within the company, and of the extent to which
these environments are changing.
♦ Ensure broad-based participation in determining what is to be

evaluated and the process to be followed.
♦ Build in an effective feedback process that is both timely and

seen as non-threatening by those being evaluated.
♦ Be adaptable to changing circumstances and requirements.
♦ Measure results against established targets, standards,

benchmarks or forecasts.
♦ Be simple, and include as few measures as possible that,

collectively, give an accurate picture of how well purchasing &
supply is performing.
♦ Include a balance of quantitative and qualitative measures.

Quantitative measures are needed to ensure that the assessment
is as objective as possible. However, not everything can be
measured quantitatively, particularly when it comes to assessing
human behaviour. Therefore, bringing in qualitative assessments
is also important to obtaining a comprehensive view of the
performance situation.
♦ Not be so costly that this cancels out any savings or other

benefits that may arise from the evaluation.
♦ Link actions and their results, so that causality can be clearly

established as a basis for follow-up action in adopting better
practices. There is no point in identifying outcomes if the reasons
for these outcomes are not understood. This means that general
indicators of performance may have to be broken down into
components, so that specific causal relationships can be identified.
There is no single best performance evaluation system applicable to

every company. Each enterprise must find its own solution, tailored to its
particular needs and context. Nevertheless, common approaches and
elements are shared by most systems used to evaluate the purchasing &
supply function. Several of these approaches are described in this
Module.
4 Module 12: Unit 1

Performance evaluation must be distinguished from what is usually called a system audit. The
purpose of an audit is to determine whether or not relevant policies and procedures are being
followed correctly, and if the resulting documentation is free of errors. An audit can also serve to
determine if anyone has been abusing the system, possibly for personal advantage. It therefore
focuses on accountability and on integrity, rather than on performance.
Evaluating purchasing & supply performance is not, unfortunately, carried out as commonly as it
should be. Your company may therefore be about to implement its evaluation system for the first
time. In such a case, the performance evaluation system should be pilot tested before being
fully implemented. This will allow you to identify and resolve any problems or difficulties that
may arise before spending much time and effort.
Once an evaluation system is in place, one of its greatest values is to show how performance
evolves over time. It is this time perspective that allows a company to identify patterns and
better understand the links between the outcomes and the causes of these outcomes.
Having said this, it is important to remember that no performance evaluation system can remain
static. It should be regularly reviewed and upgraded to accommodate changing requirements
and conditions. This is because customer requirements change, the way things are done in
purchasing & supply change, and the environment and inputs also change. Being able to keep
track of these changes is another important result of the evaluation process.
1.1 Why evaluate
1.3 The Behavioural Impact of Evaluating performance?
Performance
1.2 What makes a good evaluation system?
The very act of evaluating performance has an impact on the way people behave. 1.3 Behavioural
impact
❑ Prioritisation of activities
There is a saying “what is evaluated gets done”. If some aspect of your work is being monitored
and assessed, it is natural to want to ensure that it is properly completed. This will ensure that
the reports on your work are favourable. Nobody wants to be seen to be doing an unsatisfactory
job.
The effect is particularly noticeable if the results of the evaluation have an influence on the
person’s remuneration or other forms of incentives.
Similarly, what is not evaluated is more likely not to get done, or to have less effort devoted to it.
Obviously, however, not everything can be evaluated. Therefore, performance evaluation must
necessarily be selective and focus on what is important. Evaluation usually involves measuring
results against targets. Even amongst the targets that are
Module 12: Unit 1 5
1.2-1
International MLS ♦ Reaching the targets does n
Trade Centre
performing your job as ex
set, however, some are likely to be more important than others.
Therefore, the targets themselves must also be prioritised.
Conversely, performance evaluat
❑ Motivation The targets are not realistically a

factors beyond your control t
Performance evaluation can have a positive or
negative effect on people’s motivation.
♦ Achieving a good performan
Your motivation is likely to be high if you feel that: recognition.
♦ You have the ability to achieve the targets, ♦ The targets have been impo
even if they require extra effort. account of your views and
you don’t understand or a
♦ Performing well will result in positive recognition.
♦ The excessive focus on quantifiable targets restricts and
♦ You have
restrains beencreativity
your involved and
in setting
youryour performance
ability targets or,
to find innovative
solutions in your
at least, daily work.
you agree with the importance of reaching these
targets. 1.3-1
If performance evaluation is not motivating, this will cause people to try to

evade it in one way or another.
An example: the cost of reducing cost
An example of a de-motivating and self-defeating target could be one that

is unrealistic and focuses excessively on cost reduction at the expense of
everything else. The effects of such a target, and the priority given to its
measurement, may cause serious distortions that will actually harm overall
performance. For instance, it may cause purchasing & supply to:
6 Module 12: Unit 1

MLS
♦ Allow other key supply performance factors to deteriorate (e.g.,

quality, supply reliability, etc.), by concentrating on lowest-price
suppliers.
♦ Focus entirely on “easy wins”, such that short-term cost
reductions achieved quickly (e.g., by staff reductions) mask
long-term losses (e.g., sacrificing specialist expertise).
♦ Shift costs away from those things that are being evaluated to
those that are not (e.g., transfer responsibility for transport from
the supplier to the company’s own fleet, so that these costs are
not reflected in the supplier’s price).
♦ Use “creative accounting” to give the appearance of cost

reduction when in fact no such reduction has taken place (e.g.,
changing standard costs, modifying the stock valuation system,
spreading overhead costs differently, etc.).
Thus, the semblance of good performance may hide what is, in fact, a
deteriorating situation for the company.
❑ Being able to “sell” purchasing & supply within the company
Achieving a good performance can help the purchasing & supply function
to “sell itself” more effectively within the organisation. This is because its
contributions will be seen as more concrete, and therefore more
believable.
It is often argued that the marketing function in an organisation is valued

because it is goal-oriented. It specifies what it is trying to achieve for the
company (e.g., in terms of sales targets) and goes out to prove it. Often,
the purchasing & supply function is unable to objectively demonstrate its
impact on corporate strategy and operations. This is particularly so
because, as opposed to marketing, purchasing & supply is the function
farthest away from the external customer. This often causes it to be
undervalued and underrated.
“Seeing is believing” is a common human reaction. Unless purchasing &

supply can show evidence of what it is able to contribute, it will not be
perceived as strategically important to the enterprise. The satisfaction and
self-esteem of people working in purchasing & supply will be greatly
enhanced if they can “prove themselves” within the company.
These points illustrate the importance of getting the performance

evaluation system “right”, and of involving a broad range of concerned
people in developing it to ensure that it is both realistic and useful.
Module 12: Unit 1 7
International MLS
Trade Centre
1.1 Why evaluate
1.4 Overview of the Module performance?
Let us now have a quick look at what is contained 1.2 What makes a good evaluation system?
in the other Units of this Module.
1.3 Behavioural impact
Unit 2
The Performance Evaluation Process & Model Framework
This Unit describes the evaluation process and introduces the model purchasing & supply
performance management system. It outlines the main performance areas to be considered.
Unit 3
This Unit provides a detailed presentation of how to develop performance indicators, measures
and targets. A range of sample indicators, measures and targets is given.
Unit 4
Implementing the Evaluation
This Unit describes the process of collecting the measurement data. It shows how this data can
be analysed and reported, and how to get the required feedback.
Unit 5
Performance Evaluation of Integrated Supply Chain Management
This Unit provides an overview of how performance could be measured beyond an individual
enterprise, at the level of a supply chain. It emphasises that many of the evaluation principles
discussed in the previous Units also apply to SCM. At the same time it explains the unique
characteristics of performance measurement in the supply chain.
Learning Check
8 Module 12: Unit 1
Unit 1
Unit 2
Unit 3
Unit 4
Unit 5 Introduction
The Process
Performance
Implementing
Performance
Framework & Model
InMeasures &
the
of Integrated Targets
Evaluation
SCM
t
Unit 2 The Performance Evaluation

Process & Model Framework
Learning Objectives
By the end of this Unit, you should be able to:
♦ Outline the various stages in the performance evaluation process.
♦ Explain how performance evaluation is critically linked to the
purchasing & supply objectives.
♦ Describe how to define the scope of a purchasing & supply
performance evaluation.
♦ Describe the main performance areas and issues relating to the
function’s desired outcomes, its internal management systems and people, and the external
factors that have an impact on the way it works.
2.1 Managing the process
2.1 Managing the Process of Performance
Evaluation
2.2 Purchasing & supply
objectives
In this Unit we will identify and begin to review the main elements of the performance evaluation
process. Evaluating performance involves 2.3 Scope of evaluation
following a series of steps. It starts by considering the overall objectives of the
2.4 The performance
management model
purchasing & supply function and ends with reporting on the results of the evaluation and
obtaining the required
2.5 Performance
outcomes
feedback. This, in turn, will serve as the input into the next evaluation cycle.
2.6 Internal factors
The following figure illustrates the process usually followed in carrying out
2.7 External factors
a performance evaluation.
2.8 Conclusion & refocus
on suppliers
Module 12: Unit 2 9
International MLS
Trade Centre
Figure 2.1-1 The performance evaluation process

Scope of the evaluation Purchasing objectives
& supply • The customer base
• The processes
• The purchase areas
Feedback
• Performance areas & issues
• Performance indicators/measures
management
P&S & targets:
Related
Analysis reporting
& Staff/teams
Related Customers
to outcomes
to P&S management systems & people
Related to managing external factors
measurement Collecting the data

❑ The need for broad-based involvement
You will notice that a central feature of this process is the need to involve at each and every
stage all of those concerned with the results of the evaluation. They should include not only the
head and staff of the purchasing & supply function, but also its various customers.
There are four main reasons to involve purchasing & supply’s customers, as well as its entire
staff, in the performance evaluation.
1 ♦ Their experience will be critical to ensuring that the
performance evaluation is well conceived and focuses on the main issues. Each staff member
and each customer has a particular perspective and experience. Without their valuable
contributions, the evaluation might miss some important aspects that need looking into.
2 ♦ To ensure that everyone perceives the results of the evaluation

as credible. If customers are not involved, they may feel suspicious that the results have been
“cooked up” by purchasing & supply management to defend its position or to make a point.
3
♦ Staff and customers need to “buy into” the results of the
performance evaluation, i.e., to take ownership of its findings and help in implementing its
recommendations.
10 Module 12: Unit 2
4
♦ Participating in the performance evaluation is an important
learning exercise. Staff will obtain a better understanding of the whole of their function’s
operations, and learn what methods and techniques work best. They will also learn what they
must give priority to in their day-to-day work.
Customers, also, need to be “educated” on how to make their requirements and expectations
known to purchasing & supply. They need to understand both its potential and the constraints
that it faces in doing its job, and how to contribute to its improved performance.
If the result of participating in the evaluation is a more realistic set of expectations and improved
mutual understanding and communications, then the relationship between purchasing & supply
and its customers is likely to be strengthened.
❑ Determining who is responsible for the evaluation process
Because the performance evaluation process may involve many people, it is important to
establish who will be responsible overall for planning and conducting it.
This will generally be the function’s manager. However, top management may decide to assign
this responsibility to an outsider, e.g., another department in the company or even an external
consultant. In the case of SCM, the responsibility is often delegated to a team representing all of
the participants in the supply chain.
The purpose of bringing in an outsider is generally to ensure – and to make visible – the
impartiality and thoroughness of the evaluation. This objective can still be achieved if the
purchasing & supply manager is responsible for the evaluation, as long as others are also
substantially involved. One option might be to have joint management of the evaluation.
The advantage of internal (or at least joint) responsibility for the process is that this will make
purchasing & supply more inclined to consider the evaluation as part of its management
responsibility rather than as an outside intervention aimed at “judging” its performance.
Furthermore, as we have seen earlier, evaluation should be a continuous process, and not a
one-time affair. This is only possible if purchasing & supply management is committed to
objective evaluation, and made fully responsible for this by top management.
It may be possible that outside expertise is needed if a purchasing & supply evaluation system
is to be put in place for the first time. In such a case, an outside consultant can work to support
the function’s manager in designing the evaluation system and in conducting the pilot
application.
It can also be useful and important to have the results of a performance evaluation audited by
another function in the company. This is particularly relevant where the performance measures
relate to the function’s overall objectives (which we will review next), and if the
Module 12: Unit 2 11
2.1-1
International MLS
Trade Centre
results of the evaluation are intended to be used to market or “sell” the purchasing & supply
function within the company.
Bringing in outsiders to audit the results is especially helpful if other areas of the organisation
might question the claims made by purchasing & supply. For example, claims of cost savings
are likely to be much more credible if backed up by the finance function.
2.2 Purchasing & Supply Objectives
objectives
The starting point for every performance evaluation exercise is necessarily the understanding of
purchasing & supply’s objectives. These are the basis for defining the specific performance
criteria and 2.3 Scope of evaluation
targets against which performance will be measured.
If not done already,1 the function’s objectives should be clearly defined. 2.4 The performance
management model
They should be closely aligned to the corporate goals and strategy. Company goals generally
focus on areas such as the following:
2.5 Performance
outcomes
♦ Profitability. ♦ Sales revenue. 2.6 Internal factors
♦ Market share. ♦ Market position.
♦ Customer satisfaction. ♦ Total quality management.
on suppliers
♦ Ethical conduct. ♦ Contribution to social development. ♦ Contribution to environmental
protection.
Corporate strategy to achieve these goals usually covers the decision areas illustrated in the
following figure.
Corporate Corporate strategy:
Figure 2.2-1
strategy: the the key key dimensions dimensions 1. Which products/ services?5.
How to operate cost-effectively?
1 See also Module 1 – The Corporate Environment.

3. What conditions to offer?
2. Which markets?
4. How to enter & develop the
markets?
onontratract ct
CC
MLS
Purchasing & supply’s objectives must seek to support the strategies that
the company adopts to achieve its goals. This will generally mean
contributing to corporate profitability and competitiveness.
Each company must define its own purchasing & supply objectives. The list
given below is provided therefore only for illustrative purposes. Because of
this, some of these examples of objectives overlap. Figure 2.2-2
Examples of purchasing & supply objectives
♦ Ensure customer satisfaction (in terms of, e.g., availability,

lead-time, delivery, quality, customer service and cost).
♦ Secure continuity of supply of the inputs needed to meet the

company’s short- and long-term production plans.
♦ Secure flexibility and speed of supply of inputs needed for
the company to respond rapidly to changes in market
conditions and in customer demand.
♦ Contribute through supply of inputs to the differentiation of

the company’s products or services.
♦ Through supply of inputs, work to reduce the company’s

cycle-time for new product development and introduction,
and thus to expand its market opportunities.
♦ Contribute to innovation and developing the company’s

technological capabilities by acquiring state of the art
materials, components, technologies and production
techniques.
♦ Help the company to focus on its core competences through

outsourcing non-essential functions and services.
♦ Assist the company in making relevant make-or-buy

decisions.
♦ Contribute to corporate development and growth by

optimising supply arrangements in the context of corporate
alliances, partnerships, joint ventures, mergers and
acquisitions, etc.
♦ Help in assessing alternative corporate strategy options by

contributing its analyses of relevant supply costs, risks and
opportunities.
♦ Contribute to total quality management in the company.
♦ Contribute to total cost reduction in company operations.
Each of these objectives, as we will see later, can be broken down into
specific, measurable targets, against which performance will be
assessed.

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2.3 The Scope of the Evaluation
The scope of the purchasing & supply evaluation will depend on certain 2.2 Purchasing & supply
objectives
parameters. No evaluation can be undertaken, for instance, without first defining which
customers are concerned, because satisfying them is
2.3 Scope of evaluation
purchasing & supply’s reason for existing. It is also indispensable to know if all, or only certain,
processes relating to purchasing & supply are to be involved in the evaluation. Finally, it may
also be necessary to 2.4 The performance
determine which purchase areas or categories of items being bought are management model
to be evaluated, as the requirements and conditions affecting each of
2.5 Performance
these can be quite different.
outcomes
Let us now look at each of these three dimensions. 2.6 Internal factors
a) Mapping out the customer base
The focus of every process and of every service – if it is to be successful 2.8 Conclusion & refocus
– is to be customer-oriented. This can only be achieved if the customers on suppliers
have been mapped out with care and thoroughness.
Because customers are so important to the performance evaluation process, it should be clear
by now that defining who the customers are is an essential initial step in the evaluation process.
This may sound obvious at first glance, but in fact the breadth and diversity of purchasing &
supply’s customer base is often not fully appreciated.
It is therefore important to carefully review and specify:
♦ Who the function’s customers are.
♦ How important they are to purchasing
& supply.
♦ The exact nature of the customer relationship with purchasing & supply in each case.
♦ The needs and expectations of each
group of customers. These are likely to vary and, in fact, may in some cases even be
contradictory.
Knowing who the customers are – and their particular needs – will serve as the basis for setting
the performance criteria upon which the evaluation will be undertaken. It will also help
purchasing & supply in surveying its customers to establish their levels of satisfaction.
Furthermore, this can also help in establishing which customers might be invited to participate in
the evaluation.
Essentially, purchasing & supply’s customer base can be broken down into the groups shown in
the following figure.
MLS
Figure 2.3-1
❑ Users
The most important customers are, of course, those direct users of the
goods and services being purchased. They may be either internal or
external customers. Every department in a company is likely to be a
purchasing & supply user. Some departments, though, will be more
important users than others. In a manufacturing firm, virtually all of the
direct users will be internal. The main users will normally be departments
such as production, research & development, projects, maintenance and
customer service.
In such an enterprise, the internal users are generally those who are
most concerned with evaluating purchasing & supply performance. They
will be the ones most affected if purchasing & supply is unable to deliver
the required goods or services on time, ensure continuity of supply,
guarantee the needed quality, secure an appropriate level of customer
service from suppliers, or carry out its purchases competitively from a
total cost perspective. Internal users should therefore be the most keen
to be involved in the function’s evaluation.
In a commercial enterprise, the users will generally be external to the

company, e.g., consumers and other firms. While external users will not
normally be actively involved in an evaluation of the purchasing & supply
function, their needs and views should be taken into account (e.g., through
consumer surveys).

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This is true also for a manufacturing firm, as external customers will be buying goods and
services produced and delivered using the inputs obtained by purchasing & supply.
A firm’s external customers, of course, are not all equally important to it. Different customers will
also have different needs and priorities. Enterprises therefore need to segment their customers
– i.e. group them in accordance with these and any other relevant criteria – in order to adopt the
best possible supply strategy for each group.
The following figure shows the steps usually followed in a customer segmentation process,
taking account of customer value and preferences.
Customer Customer segmentation
segmentation Figure 2.3-2 1. Determine who are the firm’s most valued
customers in terms of revenue earned and profitability 2. Identify the critical success
factors and
selling points that drive different customer groups or segments to choose the firm’s offer
against the offers of its competitors 3. For each of these customer segments, map out
how it perceives the use value of the different attributes of the firm’s products or
services
The next figure illustrates what is meant by mapping out each customer segment’s Perceived
Use Value, based on the different criteria the customers in the segment may use to assess a
firm’s products or services.
Customer Customer Segment Segment X: X: Perceived
Figure 2.3-3
Perceived Use Use Value Value Value 5Rating432

1Criteria
Gap
Gap
n-time
O
elivery
d
ange of
R
odels
m
peed to
S
evelop new
d
odels
m
fter-sales
A
ervice
s
uality
Q
(10) (20) (25) (20) (25)
Weighting %
MLS
It is likely that each segment will perceive these criteria in a different way.
For instance, one segment may particularly value low price, while another
segment may give more importance to range of specifications or to speed
of delivery. The gap in the figure shows the difference between what the
customer segment asks for and what the firm currently offers.
It is important to note that customer values change over time, and that it is
thus necessary to undertake this analysis on a regular basis.
❑ Process customers
Users, however, are not purchasing & supply’s only customers. There are
also process customers, i.e., those with whom purchasing & supply must
interact in the course of doing its business.
♦ Suppliers. The most obvious process customers are suppliers

themselves. They are the recipients of the function’s enquiries,
invitations to offer, purchase orders, contracts, etc. Through
purchasing & supply, they are – in fact – the recipients of the
company’s business. As such, suppliers have a direct interest in
the effectiveness and efficiency of the purchasing & supply
oonntratr
CC have no interest in seeing a good business partner going broke
act ct
as a result of purchasing & supply inefficiency.
nction. A buyer company that works well will be easy and less
stly for them to do business with. Furthermore, suppliers ♦ Service providers. These a
delivering services directly to purchasing & supply in the course
of its work. They are therefore also its reciprocal customers. In a
sense, they can be categorised as a special kind of suppliers
selling services needed specifically by the purchasing & supply
function. They include, for instance, supply market information
providers, freight forwarders, transport companies, banks, testing
and inspection facilities, customs clearance agents and others.
♦ Other company departments. These are departments with

which purchasing & supply must interact on a day-to-day basis,
to carry out its operations. Depending on how the organisation
is structured, these may include, for instance, planning,
budget, design, finance, accounts payable, quality control, and
(if not a part of purchasing & supply itself) receiving, inventory
and logistics.
Only the most important suppliers and service providers will be inclined to
participate in purchasing & supply’s performance evaluation. They are
likely to have an interest in doing so particularly if the company has
established a close and long-term relationship with them, e.g., in the form
of a partnership or alliance, or if it does very significant business with
them.

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The company’s other departments, on the other hand, should almost 2.3-1
certainly become directly involved in the evaluation. As they are part of the same enterprise,
they have a common interest in ensuring that their interactions are carried out in a way that is
efficient and effective for all sides concerned.
❑ Top management
Top management, by definition, will be interested in delivering an effective strategy to meet the
corporate goals. It will therefore wish to know if purchasing & supply is making the required
contributions to implementing this strategy.
The performance evaluation will be of particular concern to top management if it considers
purchasing & supply to be strategically important to the company. When is this likely to be the
case? Consider the following situations:
♦ When the company’s products’ life cycle is short and
innovation is dependent on keeping ahead of competitors in sourcing new materials, acquiring
new technologies and production processes, etc.
♦ When demand for the company’s products shifts rapidly and
unpredictably, and it is important for supply of the required materials and components to be both
very flexible and subject to short lead-times.
♦ When supply markets for important materials purchased by the company are highly volatile in
terms of availability of supply and/or prices, and market changes could result either in supply
difficulties or in significant cost increases.
♦ When the company spends a substantial share of its revenue
(e.g., 50%-60% or more) on purchasing goods and services, and could gain substantially from
cutting its total supply costs.
♦ When price competition in markets for the company’s products
is very strong, and any saving in purchasing and supply costs would give the company a price
edge in the marketplace.
♦ When the company’s products need to differentiate themselves
from the products of the competition in order to be successful in the marketplace, and this
differentiation can be achieved through new product features, enhanced quality, better service
or faster delivery obtained through improved purchasing & supply management.
♦ When the company is going through a process of re-thinking
its core business areas, and seeks to outsource a major part of the operations previously
carried out in-house.
♦ When alliances with suppliers constitute a key element of the
company’s strategy for developing its technological capabilities and/or for expanding its
business into new product-markets.
MLS
Despite the number of situations in which purchasing & supply can

constitute a significant driver for a company’s competitiveness, it is often
the case that top management does not recognise this fact. Far too
often, purchasing & supply is considered a clerical operation, or a
commercial one at best, and not a strategically important function.2
It is important, in such situations, for purchasing & supply’s manager

and staff to help bring awareness of the function’s importance to top
management. One of the main advantages of a carefully executed
performance evaluation might be to demonstrate this fact to top
management, backed up with solid evidence.
management should be involved in planning support

and for
reviewing
the function’s work.
of any performance evaluation. In addition to ensuring that the
will address its concerns, this will help to make top
nt more aware of the ways in which purchasing & supply can b) Specifying the processes
2.3-2
tegic contribution to the company. This can lead to greater
Which processes should be evaluated will depend on how the company is

organised, and the intended breadth of the evaluation itself. For instance,
purchasing may be separated in the company’s organisation structure from
materials management, inventory or logistics. The evaluation may then
possibly only focus on those processes specifically relating to buying.
On the other hand, all of the above processes may be integrated into a
single command within the organisation, and will therefore by covered
wholly by the performance evaluation.
Even where different processes are separated from an organisational

point of view, they should still be integrated from an operational
perspective. Therefore, ideally, the evaluation should try to obtain the
broadest picture possible and cover the interactions between all of the
relevant processes, even if this means going beyond the scope of a
particular department or unit within the company.
For instance, consider payment to suppliers. This is not handled directly by

purchasing & supply, although the process is certainly initiated by it. It is
directly controlled by finance and accounts payable. Nevertheless, the
overall purchasing & supply process cannot be considered complete until
suppliers have received payment. It should therefore be an integral part of
what is to be evaluated.
In this sense, when we use the concept of purchasing & supply function in
this Module, we are referring not to a particular department or unit, but to
the full range of processes that normally make up what the function is
intended to achieve within a company.
2 For more information on how purchasing & supply can contribute to successfully developing and
implementing corporate strategy, see Module 1 – The Corporate Environment.

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Whichever elements of the process will be specifically evaluated within the buying company, it is
clear that the process of purchasing and supply at the very least also involves suppliers and the
intermediary logistics processes involved in delivering the goods or services from the supplier to
the buyer.
A broader approach can be taken, however. In some cases, the evaluation may cover the whole
of the company’s involvement in the supply chain. It will therefore cover not only inbound goods
and services (i.e., those that are purchased), but also the internal production process and the
outbound distribution of the company’s goods and/or services (i.e., those that are sold).
In such cases, the performance evaluation may even go far beyond the enterprise itself, to
consider how the entire supply chain of which it is a part is being managed. Upstream, this will
mean considering suppliers and their own suppliers, all the way up to the source of raw
materials. Downstream, the performance evaluation may then look at the company’s customers
and their customers, all the way down to the end user or consumer.
Figure 2.3-4 How far along the supply chain to evaluate?
The full supply chain, from The buyer company, its suppliers & intermediary
raw materials to final consumer logistics providers
Assembler & distributor
Suppliers of assembled components
Rubber
steelsteel Obviously, the further along the supply chain that the performance is conducted,
the more useful will be its results. For instance, when evaluating lead-time performance and
inventory costs only at the level of an individual buying enterprise (e.g., the bicycle assembler /
distributor, shown above) and its suppliers, the results might appear to look very positive.
However, an extension of the evaluation further upstream in the supply chain might show that
this result has been achieved at the cost of substantial overstocking by suppliers of components
and other inputs. The net result throughout the supply
OIL
Final consumers
Assembler & distributor
Suppliers of
assembled components
Suppliers of components & other inputs
Suppliers of raw materials
MLS
chain could well be negative. Performance evaluation of the overall

supply chain is discussed further in Unit 5.
Which processes will be covered by the performance evaluation will

therefore have to be decided in each situation. This will be conditioned by
what the evaluation is intended to focus on, and the extent of co-
operation amongst the various enterprises along the supply chain.
Having said this, a purchasing & supply performance evaluation

undertaken within a single enterprise will typically cover the following
processes:
♦ Specifying requirements and planning supply.
♦ Analysing supply markets.
♦ Developing supply strategies.
♦ Appraising and shortlisting suppliers.
♦ Obtaining and selecting offers.
♦ Negotiating with suppliers.
♦ Preparing contracts.
♦ Managing the implementation of supply contracts (including

payment).
♦ Managing logistics.
♦ Managing inventory and warehousing.
esses are covered by the various modules of the MLS. You

e invited to review these modules to consider in more detail
issues that you might wish to take into account when deciding
cover in the course of a purchasing & supply performance c) Specifying the purchase a
2.3-3
A company may purchase everything from production plants and

machinery down to ballpoint pens, passing through a wide range of
different goods and services. Each category of purchases will represent a
different degree of priority to the company.
To determine this priority, it is important to first understand and categorise

the company’s products and services for which these purchases are
required. This can be achieved by following a three-step process:
♦ Step 1: Identify the product / service lines and their markets

that bring in orders to the firm.
♦ Step 2: Prioritise the product / service lines within each market

(e.g. customer segment) in terms of the orders that
they are bringing in to the firm.

♦ Step 3: Identify the gaps between those products and services

that are prioritised and those that should be. The aim is
to eliminate weaknesses and to build strengths.
While a purchase & supply evaluation will generally focus on performance

measures for the function overall, it may also additionally focus on certain
categories of purchase items that are most important to the firm. In some
cases, an individual purchase item may itself be so critical that it will also
be evaluated on its own.
The typical purchase areas for a manufacturing firm are shown in the
following figure.
Figure 2.3-5
These purchases are obviously closely associated with what is needed for
the company’s product/service offers to be successful. Based on the
above, these purchase areas – and therefore the need to evaluate them
specifically – can be prioritised on the basis of three considerations:
♦ Their value of purchase expenditure.
♦ Their impact on the company’s operations in the event of

supply failure (e.g., due to lost production or sales).
♦ The extent to which supply of these items represents specific risks

(related to, e.g., availability of supply, quality, etc.) or particular
opportunities to the buying company.
The Supply Positioning Model3 is a tool that can be used to assess

these three factors for purposes of establishing priorities.
3 For further information on the Supply Positioning Model, see Module 2 – Specifying Requirements &
Planning Supply and Module 3 – Analysing Supply Markets.

MLS
In this model, purchases are ranked by value of purchase expenditure

based on a Pareto 80-20 distribution. Impact and supply opportunity/risk
are grouped into a single rating categorised as follows:
H = High impact/ supply opportunity / risk M =

Moderate impact/ supply opportunity / risk L = Low
impact/ supply opportunity / risk N = Negligible
impact/supply opportunity / risk
The results of an analysis of purchase area priorities taking account of

these factors might be presented graphically in the Supply Positioning
Model as follows, for a typical manufacturing enterprise.
Figure 2.3-6
By combining its expenditure with its overall impact/ supply opportunity/
risk rating, each purchase area ends up being positioned in one or another
of the four semi-circular bands in the above figure (separated by the blue
dotted curves). The resulting composite rating in this illustrative example
would show, for instance, that the purchase area consisting of office
equipment and supplies is of negligible importance as it is both low value
and very low impact /supply risk/ opportunity. On the other hand, the
category components would constitute a high priority purchase area to be
eventually singled out for individual performance evaluation.

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This type of analysis can be broken down further, if needed, to the level of individual purchase
items within each group.
In addition to representing varying levels of priority, different purchase areas will raise distinct
issues in the context of an evaluation. For instance – regarding cost – evaluating purchases of
capital equipment would normally focus on life-cycle cost, while evaluating purchases of
materials might tend to concentrate on price levels (the main cost component). Also, evaluation
of purchases of services would look at factors that are quite different to those involved in
evaluating purchases of goods.
By prioritising purchase areas and by knowing which evaluation issues to concentrate on in
each case, a performance evaluation can arrive at more precise assessments than if it
determines only the overall results of the purchasing & supply function. Decisions on how
deeply the evaluation needs to go in this regard will be decided by each enterprise on a case-
by-case basis.
2.4 The Purchasing & Supply Performance
Management Model
objectives
We will now look more closely at which specific performance areas and issues are likely to be
the subject of an evaluation. 2.3 Scope of evaluation
In Unit 3 we will then consider the question of developing specific
2.4 The performance
performance indicators, measures and targets for each of these areas.
management model
❑ Model overview
2.5 Performance
outcomes
Throughout the course of Units 2 and 3, we will be following what we are calling the purchasing
& supply performance management model. 2.6 Internal factors
This model is illustrated in the following figure. Keeping this model in mind will help you to follow
the logical sequence of the text in these two
Units. You will find reduced versions of this model as you go along, to help you to find your way
at each stage. A fully detailed presentation of the model is given on the last page of this Unit. 2.8
Conclusion & refocus
on suppliers
2.3-4
Figure 2.4-1
External factors
Internal factors Outcomes Purchasing & supply Environ-
function
Function level
ment
satisfaction Customer By customer

Availability
Supply
National
Managing infrastructure
Lead-time/ By purchase area
delivery
Corporate level
Corporate
Managing . suppliers
By supplier
Quality
Contribution to corporate
Inputs
Managing processes
By process
Customer service
profitability and competitiveness strategy
Managing people
By buyer/ team
Cost
Measuring efficiency
Measuring effectiveness
The numbers in the above model show the precise order in which we will be covering these
topics in this Unit. We will be starting with outcomes or results (1a, 1b and 1c) to understand
first what has been (or should be) achieved.
We will then move on to review those areas relating to the internal factors (2a) and the external
factors (2b and 2c) that influenced these outcomes. These help to explain why the results were
achieved, and how to improve these outcomes in the future.
❑ Quantitative and qualitative performance areas
A point to remember is that some of the areas covered by a performance evaluation will be
quantitative, while others will be qualitative.
♦ Quantitative performance areas
These performance areas can be measured objectively and subject to specific quantitative
targets. Some examples might include: cost savings, lead-time reductions, number of purchase
orders issued, number of delay-causing errors in processing import documentation, variances in
market price forecasts, etc.
♦ Qualitative performance areas
These are performance areas that are subjective in nature and therefore more difficult to
measure. Qualitative criteria might include, for instance: customer attitudes and levels of
satisfaction, the relationship between purchasing & supply and
International MLS In each of the performance areas
Trade Centre
understand and define exactly wh
allow
its customers, the leadership of the purchasing us to later
& supply address the ques
function
performance indicators,
and its relations with top management, relations amongst the measure
function’s workforce, the quality of its team-work with other
functions, etc. ♦ What do we mean by conti
♦ How do we define lead-tim

Qualitative performance is subject to perceptions, and these can
differ substantially from case to case. For instance, research
♦ What do we has
consider to be
shown that the perceptions of the purchasing & supply function,
♦ When
the suppliers and the users often diverge significantly should we consider
regarding
achieved?
which performance criteria (e.g., delivery, service, quality and
cost/price) are most important to them. Not surprisingly, their
♦ What do we mean when w
perceptions also often vary concerning what the level of
contributes to the compa
performance has actually been in each area.
♦ What can be considered state-of-the-art
❑ The importance of defining parameters clearly
2.4-1
♦ When is an outsourcing operation of a

service previously performed in-house
considered successful?
Each performance area has to be clearly defined as a basis for

indicators, measures and targets to be later developed. These
definitions may vary from company to company, because of their
particular needs and circumstances. What is important is that they
should be precise, commonly understood within the company
concerned and consistent over time.
2.5 Performance Outcomes
❑ The four fundamental goals
objectives
Evaluation of effectiveness focuses primarily on the outcomes that have
been achieved in relation to what was required. Cutting across each and every specific outcome
are one or more of the four fundamental goals of effectiveness in 2.4 The performance
management model
purchasing & supply:
2.5 Performance
♦ Maximise customer satisfaction.
outcomes
♦ Maximise supply opportunities.
2.6 Internal factors
♦ Minimise supply risk.
♦ Minimise supply cost. 2.7 External factors
These four core goals are themselves often
on suppliers
contradictory. For instance, minimising supply risk (e.g., through employing a more reliable
source of supply) or maximising customer satisfaction (e.g., through better quality) will often
entail a higher supply cost. Taking advantage of new opportunities will almost inevitably involve
facing unknown risks.
Some might argue that, in the end, everything comes down to cost. A risk, if it materialises,
becomes a cost. An opportunity, if not taken advantage of, becomes an opportunity cost.
Unsatisfied customers will also become a cost to the company, because of reduced productivity
(in the case of internal customers) or by taking away their business (in the case of external
customers). However, not everything can in practice be brought down to dollars and cents, and
so these other three broad dimensions will continue to find their own expressions of
performance.
The task of purchasing & supply is therefore to arrive at what is often a finely-tuned balancing
act that takes into account these various competing dimensions in such a way as to serve the
company and its customers as well as possible over the long term.
❑ The three levels of outcomes
Performance areas concerning outcomes can be considered at three main levels:
♦ Corporate-level outcomes (1a)
♦ Function-level outcomes (1b)
♦ Outcomes at the level of specific function elements (1c)
Each of the above three levels of outcomes must aim, ultimately, at achieving customer
satisfaction.
International MLS
Trade Centre
a) Corporate-level outcomes
❑ Contribution to corporate profitability and competitiveness
Corporate-level outcomes relate to the contributions that purchasing & supply makes – by
meeting its own overall objectives – to corporate goals and strategy. They usually focus
primarily on profitability and enhanced These outcomes competitiveness. build upon
External
the function-level outcomes that we will review next, but
Internal Outcomes
Environ-
Purchasing &
Functional supply ment
Customer
take these up to a higher level.

Suppliers
Corporate
Processes We have already looked at
Inputs some of the broad-based
People
Buyer
functional objectives to
Effectiveness which these outcomes might relate, e.g., ensuring continuity of supply for production,
facilitating rapid response to market change, product differentiation, reduced new product cycle-
time, technological innovation, total cost reduction, etc.
Consequently, performance evaluation at this level might focus on some of the issues illustrated
in the following figure.
Figure 2.5-1
Illustrative examples of possible issues to evaluate concerning

corporate-level outcomes
Evaluate the extent to which...
♦ ...production has been able to continue without disruption
thanks to a dependable supply of the required goods and services.
♦ ...the company has gained ground against competitors by
responding rapidly to market changes thanks to speedy and flexible supply of inputs.
♦ ...the company’s product or service offer has been able to
differentiate itself from offers of the competition thanks to new components sourced by
purchasing & supply.
♦ ...the company’s cycle-time for developing and launching new
products has been shortened thanks to more rapid supply of the inputs required for R&D and for
production.
♦ ...the company has been able to offer technologically
innovative products or services as a result of state-of-the-art inputs identified and sourced by
♦ ...purchasing & supply has successfully outsourced at lower cost non-core services or
functions that were previously undertaken in-house (e.g., data processing, maintenance,
accounting, legal aid, etc.).
Availabi- lity
satisfaction Customer Supply
Infrastructure
National
Lead-time/ delivery
Corporate
Quality
Customer service
Cost Purchase
Efficiency
Supplier
Process
♦ ...successful make-or-buy decisions have been taken with
substantial input from purchasing & supply.
♦ ...corporate alliances, partnerships, joint ventures, mergers
and/or acquisitions involving special supply arrangements have been successfully negotiated
and implemented with substantial input from purchasing & supply.
♦ ...corporate strategy options have been assessed
incorporating substantial input from purchasing & supply concerning supply costs, risks and
opportunities.
♦ ...purchasing & supply has fully complied with all requirements
aimed at implementing total quality management in the organisation.
♦ ...purchasing & supply has contributed measurably to
corporate cost reduction programmes.
❑ Assessing customer satisfaction in relation to corporate-level
outcomes
The main customer for corporate-level outcomes is top management. Assessing top
management’s level of satisfaction with regard to these outcomes will therefore be very
important. However, other important functions in the organisation such as research &
development, design, production, marketing, planning and finance will also be interested in
these outcomes. Their levels of satisfaction should therefore also be assessed.
One of the main purposes of assessing customer satisfaction is to determine whether there is a
gap between what purchasing & supply is achieving in terms of its quantitative outcomes and its
customers’ perceptions of these achievements. It also serves to determine whether there are
customer expectations that are not being sufficiently well understood, let alone met, by
b) Function-level outcomes
❑ What is covered
External
Internal Outcomes
Outcomes at the functional

Environ-
Purchasing & supply ment
Customer level will – collectively and over time – contribute to

Suppliers
Corporate
achieving the corporate-level outcomes described above. They will generally

FunctionalAvailabi- lity

Infrastructure
National
Lead-time/ delivery
Corporate
Quality
Processes
Customer service Inputs People
Buyer
Cost
concentrate on the issues

Effectiveness outlined in the following figure.

Purchase
Efficiency
Supplier
Process
2.5-1
International MLS
Trade Centre
Figure 2.5-2
Areas usually covered when evaluating performance in relation to

function-level outcomes
Concerning supply availability
♦ Supply range, quantity and flexibility.
♦ Securing continuity of supply over the required planning
horizon.
Concerning lead-time and delivery
♦ Lead-time reduction.
♦ Lead-time flexibility in response to needs.
♦ Reliability of delivery (delays, etc.).
Concerning quality
♦ Appropriateness of quality to requirements.
♦ Reliability / deviations in quality.
♦ Innovation in quality.
Concerning customer service
♦ Provision of information to customers.
♦ Development of customer knowledge & skills.
♦ Customer technical support and problem-solving.
Concerning cost
♦ Cost reductions.
♦ Cost avoidance.
?
♦ Price vs. total cost of ownership.
♦ Financial equivalents – opportunity savings & costs.
❑ Considerations regarding supply availability performance
The main performance issues here concern whether
External
purchasing & supply is able to secure access to the goods and

Environ- ment
services required by users.

Internal Outcomes Purchasing & supply
FunctionalAvailabi- lity Customer
Lead-time/ delivery
Corporate Suppliers
Quality
This means obtaining the required range of purchase items

Inputs
Processes
People
Customer service
Cost Buyer in the desired quantities, and

with the needed flexibility of
Effectiveness

Infrastructure
National Corporate
Purchase
Efficiency
Supplier
Process
MLS
supply over time. It therefore also means securing dependable sources of

supply that can ensure continuity of availability of what is needed over the
company’s required planning horizon.
Shortfalls in availability of what is needed at any point in time will be

counted against purchasing & supply’s performance. If no (or very few)
shortfalls occur, this will mean that it is performing well.
When applied to stocked items, this will mean having the goods in stock as
and when needed, and avoiding stockouts. This is usually called supply
service level. Under just-in-time (i.e., stockless) replenishment strategies,
performance will be gauged against the ability to ensure that production
inputs arrive precisely as and when needed.
For one-off purchases of goods and services that are not kept in stock or
supplied continuously through just-in-time replenishment, this area of
performance will mean looking into purchasing & supply’s ability to identify
and link up with supply sources rapidly.
Some definitions concerning availability that would need to be clarified

first would involve, for instance:
♦ How is the service level to be defined? Options include, e.g.:
✓ When requisitions are satisfied at first request.
✓ When specific items on requisitions are satisfied at first

request.
✓ When – e.g., upon random observation – there is

sufficient stock available to meet expected
requirements.
✓ When stock replenishment periods are satisfied as

planned.
♦ In the first two cases, how is the period associated with

“satisfied at first request” to be defined? This is often counted as
satisfied within 24 hours. However, it could be longer... or
shorter.
♦ When is a customer’s request considered to have been

satisfied? This would generally be when 100% of the required
items are delivered, but it could be set in certain circumstances
(e.g., supply shortages) at a lower level, for instance, 95%.
♦ What happens if there are acceptable replacements? For

example, if an item specifically required is not in stock but can be
replaced by another readily available item that can serve the
purpose, would that count for or against performance?
These are some examples of issues to be settled in each case before

proceeding.

International MLS
Trade Centre
❑ Considerations regarding lead-time and delivery performance
Lead-time is closely linked to availability, but has its own particularities. Here, we are
External
Internal Outcomes
Environ-
Purchasing & supply looking at questions such as
ment
Customerperformance in reducing overall
Corporate lead-times, in providing for lead-
Suppliers time flexibility to adapt to special circumstances (e.g., urgent requirements), and in lead-
time
Inputs
FunctionalProcesses
People
Buyer reliability (i.e., meeting delivery promises).
Effectiveness
The first thing to consider here, however, is what is meant by lead- time? Is it the lead-time from
the customer’s requisition to delivery of the item(s) to the customer ready for use? (What
happens, though, if the original requisition is incomplete or defective, and has to be redone?
Does this time count?) Or is it the lead-time from purchase order to stock? Or is it from
purchase order to shipment by the supplier? The first definition should generally be preferred,
as it covers the full cycle. The second definition could serve for stocked items. Lead-time can
then be broken down into its various components for more detailed assessment.
Another question to answer is what is meant by on-time delivery? Is it within plus or minus 24
hours from the promised date? Or 48 hours? Or more? In short, what deviations are
acceptable?
❑ Considerations regarding quality performance
In this performance area, issues that matter include determining whether the specified quality
Purchasing & supply actually meets customers’ needs in practice, as well as the extent of deviations
from the specified quality in what is delivered to the customer (i.e., reliability of
Inputs Buyer quality). Another issue concerns innovation. This reflects the need for purchasing &
supply to adopt a proactive approach by taking the initiative in identifying and pursuing new
quality options.
Some of the parameters to be defined include, for instance, what is meant by rejection of the
deliveries by the customer? What deviations in quality are acceptable? If small defects can be
corrected easily in- house, does that count as rejected or not? What happens if the customer
was the cause of the problem due to error in specification? How is innovation in materials,
components or equipment to be defined? How different does a purchase have to be from what
was previously bought in order to be considered “new”?
Availabi- lity

Infrastructure
National
Purchase
Lead-time/ delivery
Corporate
Quality
Customer service
Cost
Efficiency
Supplier
Process
External
Internal Outcomes
Environ- ment
Customer
Suppliers
Processes
People
Functional
Availabi- lity
Lead-time/ delivery
Corporate
Quality
Customer service
Cost
Effectiveness

Infrastructure
National Corporate
Purchase
Efficiency
Supplier
Process
MLS
?
❑ Considerations regarding customer service performance
We have earlier reviewed the importance of evaluating the service level relating to availability.
However, under this heading we are
External
referring to service in terms of the additional support often required by customers. It

Internal Outcomes
concerns matters such as

Environ- ment
Purchasing &
Functionalsupply
Customer
Availabi- lity
satisfaction Customer Supply National Corporate

Infrastructure
Purchase
Lead-time/ delivery
Corporate Suppliers
Supplier
Quality availability of information needed by customers, the Inputs development of required

Processes
Process
Customer service
People
Buyer
Cost
customer knowledge and skills

Efficiency
(e.g., through training) and the ability to resolve problems that the customer faces in
Effectiveness
relation to the delivered goods and services.

This area of performance assessment is usually more subjective and qualitative than the ones
we have been considering earlier. This is because definitions may be even harder to come by.
For instance, when is the level of information provided satisfactory? What kinds of information
are we talking about (e.g., technical, commercial, contractual, on supplier capabilities, etc.)?
Who determines how much customer training is adequate (e.g., in relation to the purchase of a
new piece of equipment)? How can a serious customer complaint be distinguished from a minor
one? When is a customer problem considered resolved?
❑ Considerations regarding cost performance
Cost performance – and in particular cost saving – is an important organisational focus, and can
become the subject of
External
Internal Outcomes controversy and debate. It is therefore important to
Environ-
Purchasing &
Functionalsupply ment
Customer understand the different types of cost savings – and the ways in
Suppliers
Corporate
which these can be determined – to assess purchasing & supply cost performance in a way that
is
Inputs
Availabi- lity

Infrastructure
National
Lead-time/ delivery
Corporate
Quality
Processes
Customer service People
Buyer
Cost credible and accepted by the

Effectiveness organisation.
Cost savings can essentially be achieved either by reducing or by avoiding costs. There are,
though, many issues that have to be considered when assessing performance in this area. It is
also important to remember that there can also be negative cost performance, i.e., cost
increases, and not only savings. Furthermore, there are factors that influence costs that are
outside of the control of purchasing & supply, and should not, therefore, be counted in the
performance equation. On the other hand, it is also possible to determine – and to bring into the
equation – the cost equivalents of other outcomes that are not specifically financial in nature.
Purchase
Efficiency
Supplier
Process
International MLS
Trade Centre
♦ Cost reduction
Cost reduction involves bringing down costs that have been previously incurred. Without action
by purchasing & supply, these costs would continue to be paid. They are therefore an outcome
of the function’s performance.
Purchase prices are one of the most obvious elements of cost reduction. Price reduction is
simply the difference between the price that is paid now and the price paid at some point in the
past, typically the previous year. This is only appropriate as a performance measure if what is
being purchased is the same (or virtually the same) as what was purchased previously.
Unit price reduction is a “hard” cost saving, i.e., one that is highly tangible and easy to justify
and prove. It can be audited by comparing today’s invoices with invoices from the previous
period. However, it is obviously necessary to distinguish price ✔✔

Price reductions achieved must be put in the
savings achieved by purchasing & supply from any overall price reductions that may have
occurred in the marketplace. If prices have changed across the board, then the savings cannot
be attributed to the efforts of purchasing & supply. context of changes in the overall market price.
In order to back up claims of price reductions, it will therefore be important wherever possible to
obtain outside information on how market prices have changed over the evaluation period. This
information can be obtained from various sources, such as:
✓ Prices listed in industry journals, advertisements,
market surveys, etc.
✓ The Internet, including a growing number of Internet
auction sites where price information is available.4
✓ Recorded prices in established exchanges (for
commodities).
✓ Price indices (e.g., for materials) published by
government statistical offices, industry associations and others.
✓ Quotations, price lists, etc. received from other
suppliers of goods and services.
✓ Information obtained from informal contacts in the marketplace, e.g., other buyers and
suppliers.
Obtaining a reliable basis for assessing how the market price has moved is often not possible.
Where independent sources of information do not exist, conservative assumptions should be
made and recorded along with the rationale for claiming price savings. If there are good reasons
to consider that price movement in the market has been small, it can reasonably be ignored.
4 For more information on Internet sources of information, please see ITC’s website at
www.intracen.org/ipsms.
MLS
In some cases, even when not purchasing an exact equivalent of

what was previously purchased, it may be possible to derive a
reasonably “hard” figure for a price saving. For example, the
supplier’s quotation may be sufficiently detailed to be able to work
out and justify the cost impact of any changes to the earlier
specification. This element can then be excluded to give a
reasonable price comparison with previous purchases.
On the other hand, the price reductions may come about

precisely because of a conscious effort to change the
specifications, e.g., through value analysis or standardisation.
These price reductions would also, therefore, represent valid
outcomes of purchasing & supply’s performance.
In addition to obtaining price reductions through negotiations,

through changed specifications or by sourcing from new
suppliers, cost cuts can be achieved through:
✓ Using different materials or components.
✓ Reducing the variety of purchase items.

✓ Cutting back on safety stocks through lead-time
reductions.
✓ Changing modes of transport, or consolidating cargoes and

arranging more economic transport quantities.
✓ Reducing costs of inspection and defect correction by

ensuring quality at the source.
✓ Reducing administrative costs of

purchasing through use of frame
contracts, Internet-based purchasing,
purchasing cards, etc.
Purchasing & supply will always be called
upon to demonstrate that any cost
reductions achieved have been the result of
its own efforts.
♦ Cost avoidance
Cost avoidance means avoiding a future cost that would

otherwise be incurred. Cost avoidance is harder to prove
because – unlike cost reduction – it is not based on a past track
record, and therefore hard evidence does not exist. Cost
avoidance is nevertheless a valid performance indicator, but it is
particularly important to document since it is highly likely to be
questioned.
An area where cost avoidance savings are often claimed is in

relation to obtaining price reductions (or avoiding price increases)
during negotiations. This is usually not a reliable measure,
however, as suppliers will often deliberately quote a high price
expecting the buyer to “beat them down”. The original quoted
price cannot therefore be taken to be a realistic reference point.

International MLS
Trade Centre
This causes a problem, because it is very difficult to measure the true level of cost avoidance
achieved from a negotiation, although credit should of course be claimed for genuinely good
negotiation outcomes. If reference price information can be obtained from independent sources,
including the supplier’s other customers – or if the supplier has a standard price list and contract
terms that are changed as a result of the negotiation – then the claims of cost avoidance will be
easier to justify.
Cost avoidance when purchasing new requirements can also be achieved in many ways, not
just in the prices paid to suppliers. It can happen, for instance, when previously unsuspected
options for sourcing and transport are identified as a result of carrying out supply market
research.
✔✔
Cost avoidance can apply to any area as a result of improved specifications,
Another example of cost avoidance is where a value analysis/ value engineering project5 with
involvement of the supplier takes cost out of the design for a major custom-made piece of
machinery being purchased for the first time. A direct price reduction achieved on the new
purchase cannot be precisely negotiation practices, supplier
measured, since a machine of this type has not previously performance, transport
been bought. It should, however, be possible to calculate the arrangements, purchase
management systems, etc.
benefit from analysing the changes that the project has made, especially if the supplier has
made cost estimates for both the initial and the revised designs.
In general, however, cost avoidance savings are open to criticism and need to be treated
carefully. Any tenuous claims of excessive savings due to cost avoidance will damage the
credibility of the overall cost saving figures, and of the purchasing & supply function generally. It
is therefore best to err on the side of caution when maintaining that costs have been avoided.
♦ Cost increases
The reverse situation is also possible, i.e. the buying organisation may pay prices or incur other
costs that are higher than those that might have otherwise been possible.
If the company pays higher prices or incurs higher costs in any area, then the effect of these
increases should be deducted from any overall cost savings that have been achieved in other
areas.
In the case of price increases, the following rules should apply:
✓ If the company pays a higher price while the market
price remains stable or decreases, then it is reasonable to attribute this increase to poor
performance.
5 See Module 2 – Specifying Requirements and Planning Supply.
✓ If the buyer’s prices increase in line with market price
rises, then relative cost performance will be neutral, and should not be attributed to poor
performance.
♦ Windfall cost savings
Windfall savings may occur as a result of significant and unexpected changes in the market
situation, generating unforeseen cost reductions. This may affect not only prices, but also other
factors like freight rates. These factors are, once again, outside of the control of purchasing &
supply, and cannot therefore be credited to good performance. ✔✔

Windfall cost savings result from significant and unexpected changes in the market situation and in
other relevant areas. Credit cannot be claimed for these.
If the spot market price of a commodity has been stable for a period and then suddenly drops,
for instance, this would not be counted as an achievement by the purchasing & supply function,
however real the price reduction – and its positive effect on the company’s budget – may have
been. Conversely, an increase in the price of the commodity will not be the fault of purchasing &
supply, and therefore its cost performance should not be penalised.
♦ The outcome of commodity purchase strategies
The situation would, of course, be different if purchasing & supply had hired experts in trading
the commodity, and was able to optimise the management of its exposure in the market.
This could involve applying strategies to “beat” the commodity market price (e.g., through
speculative purchasing) or to minimise the effects of short-term price fluctuations (e.g., by
buying forward, hedging, using call options, etc.). By comparing the actual prices paid as a
result of these strategies with the equivalent prices that it would have paid had its requirements
continued to have been bought on a spot basis, a company can assess the extent to which it
has saved money (or reduced the risk of sharp price fluctuations).
Again, the reverse is also possible. Speculative purchasing, in particular, is risky and can result
in paying prices above what otherwise might have been achieved.
♦ The impact of the volume of purchases
Price is not, of course, solely determined by purchasing & supply performance. It will also vary
in line with the volume of purchases. This will often be determined by how the company’s
business is progressing, independently of how well the purchasing & supply function is doing its
✔✔
job.
Prices are likely to

For instance, a company’s purchases may be cut by 50% due to a drop in its own sales,
resulting in a supplier price increase change with variations in the
of 10% for purchased materials. This increase cannot be purchase order quantities. attributed to
poor purchasing performance. Likewise, a price
drop of 10% resulting from a 50% increase in purchases due to
International MLS
Trade Centre
growing company business cannot be claimed to be the result of improved purchasing & supply
performance.
Supply volumes of a particular item, however, may be increased as a result of conscious efforts
by purchasing & supply to reduce variety or to consolidate requirements into a term contract,
rather than buying on a spot basis. A price saving from such actions should, therefore, be
attributed to good performance.
♦ Price vs. total cost of ownership
The price is often only a small part of the total cost of a purchase. To obtain the full picture,
other costs have to be considered. The most comprehensive range of cost elements relating to
purchasing & supply is covered by the concept of total cost of ownership. It is particularly
appropriate to assess performance in the purchase of equipment.
The total cost of ownership covers the following cost elements:
Figure 2.5-3
Transaction costs
• Price
• Administrative purchasing
Post-transaction Pre-transaction
costs costs
• Identification of needs
cost of
• Transport / delivery
• Tariffs, duties & taxes
• Invoicing & payment
• Inspection & testing
•
Installation & commissioning
In the case of equipment, the true cost of ownership will not be known until the equipment has
completed its useful life and has been disposed of. This might not be known for ten or twenty
years or more! Thus, assessing the total cost of ownership involves a substantial element of
assumptions and forecasting.
This can leave cost reduction figures calculated on the basis of the total cost of ownership open
to criticism. As far as possible, purchasing & supply should develop total cost of ownership
models in conjunction with other relevant functions (e.g., production, transportation, research &
development, etc.) so that the result is likely to be accepted by them.
• Operating labour & consumables) costs (energy, • Investigation of supply
• Stockholding costs sources
• Maintenance & repairs
• Qualification and
• Spare parts registration of suppliers
• Downtime / lost output
• Communications between
• Wastage in production buyer & supplier
• Defective outputs
• Training of buyer and/or supplier
• Lost customer goodwill & reputation
• De-commissioning disposal
and
The actual total cost of ownership will not be known until the product reaches the end of its life cycle.
It therefore involves making assumptions and forecasts.
Returns
•
Follow-up correction
•
• Late delivery
✔✔
2.5-2
MLS
♦ Financial equivalents: opportunity savings and opportunity

costs
Because top management often focuses on the financial
implications of company operations, it is a good idea, wherever
possible, to express performance evaluations intended for senior
executives in financial terms. This will also help to raise the
visibility of purchasing & supply, and to obtain more support for its
role.
Another good reason for using financial measures in

performance evaluation is that money provides the most
effective common denominator. Very often, non-financial
measures can be converted into a financial equivalent. Using
financial figures as a common denominator provides for:
✓ Givinga sense of the total benefit or cost of all of the

purchasing & supply function’s activities (by
aggregating dissimilar benefits).
✓ Establishing
a basis for making rational choices
amongst competing uses of resources.
Financial equivalents can either have a positive or a negative

impact on purchasing & supply’s performance. In other words,
there are both opportunity savings as well as opportunity costs.
Some examples of converting non-financial performance to

equivalent financial values are given below:
✓ Work-hour savings. An improvement project to simplify

a process will reduce the required amount of time spent
on it. An equivalent financial value for work- hours
saved can be established using the company’s standard
hourly costs of different grades of staff.
Staff costs will not actually drop, however, if the same

staff remain employed doing the same job despite the
process change. This approach therefore assumes that
the time saved will be spent on other more productive
activities, and that this activity has a value equivalent to
at least the staff hourly rate. This is a conservative
approach. Since a company should expect a return on its
assets – including people – their value should actually be
greater than their cost of employment.
✓ Lead-time reductions. A company may sometimes

receive an incentive payment from its customers for early
delivery. If this is attributable to purchasing & supply’s
performance in reducing the supply lead-time of
production inputs, then purchasing & supply can rightly
claim that the value of its contribution is equal to the
incentive payment received from the customer.

International MLS Different companies and
Trade Centre
to what they consider rea
✓ Lost production or sales. equivalent financial value
happen. For instance, production may be halted reasonable
and with the man
sales lost due unavailability of materials on time. These are perceive
your figures
excess costs or losses of revenue should also be
Assessing cost performance can
attributed to purchasing & supply’s performance.
itself costly. In addition to arriving
evaluation financial
It is not worth converting an outcome to an equivalent of cost performance is
expenditure items,
figure if the only way of doing so is very indirect or tenuous, and much less
since
purchases.
this will damage the overall credibility of purchasing & supply’s
performance claim. As with cost avoidance, it is wise to calculate
The actual values
and of cost reductions
use equivalent financialand increases
figures should bebecause
conservatively, taken into
they
account in budgeting, regardless of how
are often not “hard” evidence. they are treated as far as
performance measurement is concerned.
2.5-3
❑ Assessing customer satisfaction in relation to function-level

outcomes
Even when quantitative measures are developed for function-level

outcomes, it will be important – as it is also for corporate-level outcomes
– to determine the degree of customer satisfaction. This will help to
further specify any gaps that may exist between the function’s
achievements and its customers’ expectations. At this level, the main
customers will be users and process customers (i.e., other departments,
suppliers and service providers).
The expectations of these different customers might well vary, and in

some cases even be contradictory. For instance, consider the
contradictions that might arise between the expectations of users,
suppliers and transaction customers. For instance:
♦ Suppliers may wish users’ orders to be in line with their

production plans, while users will want suppliers’ offers to adapt
flexibly to their changing requirements.
♦ Users may wish to buy equipment that is more expensive up

front but which will be more efficient and involve lower operating
costs, whereas the finance department may prefer to have its costs
spread out later over time to take account of the company’s cash
flow situation.

MLS
c) Outcomes at the level of specific functional elements
❑ What is covered
Once the overall function-level outcomes have been established, it may be

useful to zoom in to review performance at the level of specific functional
elements. This can provide a better understanding of what makes up the
function-level outcomes. These outcomes will generally be similar to the
ones that we have just been considering, although they may often be more
detailed. Outcomes at this level may include the following:
♦ Outcomes by customer segment.
♦ Outcomes by purchase area.
♦ Outcomes by supplier.
♦ Outcomes by process.
♦ Outcomes by buyer/purchase team.
These different elements obviously interrelate and overlap significantly, as

shown in the following illustration.
Figure 2.5-4 Interrelations between

specific elements to be evaluated
You will notice from the above figure that suppliers can (and should) be
viewed not only as providers of goods and services to a buying

International MLS
Trade Centre
company, but also as customers of its purchasing & supply function. This dual role is not always
entirely appreciated.
Bringing the assessment down to this level often makes it easier to understand the linkages
between the function’s outcomes and those internal and external factors that have a bearing on
purchasing & supply’s performance. We will be considering these influencing factors later in this
Unit.
❑ Assessing performance outcomes by customer segment
We have identified three kinds of customers that purchasing & supply must attend to:
♦ Users.
♦ Process customers.
♦ Top management.
External
Internal Outcomes The issue for purchasing & supply here is to determine
Environ-
Purchasing & supply Functionalment
Customer whether it is important or not for it to identify performance
Suppliers
Corporate
outcomes by individual customers or by groups or segments of customers. The
Inputs
Availabi- lity

Infrastructure
National
Lead-time/ delivery
Corporate
Quality
Processes
Customer service
People
Buyer
Cost questions that it needs to

Effectiveness address are: Who are our main customers? What makes them our main customers?
What do they need from us? And what do we need to know about the extent to which we are
meeting their specific expectations?
Let us look at these questions in relation to each of the above customer segments.
♦ Users (internal and external)
All company departments will be users of the goods & services acquired by purchasing &
supply. However, some users will be more important than others, either because of the
expenditure value of their requirements or because the purchases that they need are critical to
their operations and these operations are of strategic importance to the company. This will
reflect the nature of the purchase items that they require, as given by the Supply Positioning
Model that we reviewed earlier. If you recall, this model defined priorities for purchase items
based on two parameters:
✓ Purchase expenditure. ✓ Impact / supply opportunity/ risk (I/SO/R).
The exact profile of the internal customers’ priorities for purchasing & supply will tend to vary
substantially from company to company. However, the following table illustrates what might be
the situation in a typical manufacturing firm.
Purchase
Efficiency
Supplier
Process
2.5-4
Figure 2.5-5
Requirements of priority user departments (internal customers)
Types of requirements and operations serviced
Department
Level of... 6
by purchasing & supply
I/SO/R
expenditure
♦ Supply of raw materials, components, packaging Production
materials, services and other inputs required for
HH ♦ Supply of construction services and equipment required
production as per requirements. Projects
MM
for projects.
Research & Development

♦ Supply of equipment, materials, technical services and
LH
other inputs required for R&D.
Quality Management
♦ Supply of equipment, materials, services and other inputs
LM
required for testing and quality control.
Customer Support
♦ Supply of spare parts and components required for direct
M
resale to external consumers (in the case of a company producing and selling appliances, equipment, etc.).
M ♦ Supply of spare parts, tools, equipment, materials and

Maintenance
MH
services required for maintenance.
Logistics / distribution / stores

♦ Supply of stores equipment, fuel, materials and services
M
required for transport and warehousing. (This may be part of the same department as purchasing & supply.)
L
All departments
♦ Supply of office equipment and supplies, electric power,
LN
catering, etc.
The ratings on the last two columns will help purchasing & supply to determine which user
departments will constitute its highest priority in terms of customer-specific performance
assessment. Obviously, in this case, production will be its highest priority followed by
maintenance, projects and customer support. If needed, this analysis can be made even more
specific by breaking down the ratings according to individual categories of purchase items
required by each user.
The ratings shown above will also allow purchasing & supply to estimate which are likely to be
each user department’s priorities in terms of function-level outcomes (i.e., availability, lead-time,
quality, customer service and cost). For instance, Research & Development is not likely to be
particularly concerned about cost, as their expenditure is relatively low. On the other hand,
considering the nature of their work and their high I/SO/R rating, they are likely to be concerned
with quality (particularly innovation), availability and customer service for the high tech (and
possibly difficult to source) equipment and services that they need.
6H = high; M = moderate; L = low; N = negligible.
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Armed with this information, purchasing & supply can determine whether it is necessary to
arrive at performance outcomes by specific user departments and, if it is necessary, which kinds
of issues to focus on.
Regarding the organisation’s external customers, we have seen earlier how they can also be
segmented based on their value/profitability to the firm and their different preferences and
perceived use values.
Assessing performance in relation to these different external customer segments will
necessarily focus on the extent to which purchasing & supply has contributed to closing the gap
between the segment’s perceived use values and the firm’s offer in relation to each of its
product/service attributes.
Performance measures must balance the needs of internal and external customers. If
performance measures are skewed in one direction or another they will cause distortions in the
supply chain. This is illustrated in the following example.
Figure 2.5-6
Only paying customers
♦P A customer rewarded scores. customers Although distribution
rocess centre for PC components had explicit measures for

service and customer satisfaction. Employees were with annual bonuses based on their
customer service However, there were no such measures for internal
such as the company’s own manufacturing plants. the service level for internal customers was
not tracked, it company’s same became cusclear that there was a serious problem when the
manufacturing plant issued a tender to purchase components being held at its own distribution
centres.
the
The had of of valuable whom tomercaused delays were customer that significant being had built
supplied orders inventory up as to by competing a problems the direct distribution result
manufacturers at the of the centres.
plants reward and – some policy loss
s
♦ Process customers
Process customers include other internal departments, suppliers and service providers.
Purchasing & supply must interact with these customers in the process of achieving its desired
corporate-level and function-level outcomes.
Here, purchasing & supply needs to look at the outcomes to be achieved with respect to these
interactions. In a sense, these would be intermediary outcomes that would have a return effect
on the function- and corporate-level outcomes needed by its ultimate customers, i.e., users and
(for strategic reasons) top management. 44 Module 12: Unit 2
MLS
Each process customer will need a different set of outcomes, in

line with the nature of its relationship with purchasing & supply.
These outcomes will tend to be qualitative, rather than
quantitative. For instance, suppliers (and possibly service
providers) with whom a partnership relationship is being
developed will seek outcomes such as the following:
✓A strong degree of collaboration and long term focus.

✓A high level of trust and strong personal relationships.
✓ Joint assessment and reduction of costs.
oonntratr
CC of requirements sufficien
acct t
on time and to be treated
✓ Muchinformation sharing to promote optimal decision-
making. Purchasing & supply is almost certainly going to want to assess
its own performance in relation to those customer- suppliers with
✓ Joint investments made to improve the efficiency and
whom special partnership arrangements exist. These are
effectiveness
relationships that canofmake
doingorbusiness.
break purchasing & supply’s
performance
✓ Disputesinresolved
today’s bycompetitive business environment. Paying
discussion.
close attention to them in the course of a broader performance
evaluation process
These will not be theis same
likely to pay off quickly.
outcomes requiredOn
bythe other hand,
assessingorperformance
suppliers in the with
service providers casewhom
of routine
only commercial
a
relationships will not be particularly important.
routine commercial relationship exists. These
2.5-5
suppliers will only need, for instance, to be informed
The extent of a company’s dependence on a supplier will also
influence how keen it will be to assess its own performance in
treating that supplier as its customer.7 The buyer may be highly
dependent on the supplier, e.g., because the purchase item is
critical and there are no other sources of supply. It is also
possible that the supplier may have no reason to feel particularly
attracted to doing business with the buyer, for instance, because
its level of business is very small. In such cases, it will be
essential for the buyer to perform as flawlessly as possible to
keep the supplier’s interest, and monitoring outcome performance
will be very important.
Purchasing & supply – as we will see shortly – also needs to

identify performance criteria to evaluate its suppliers in their
counterpart role as providers of the required goods and
7 See Module 4 – Developing Supply Strategies.

services. While the relationship with suppliers is obviously

reciprocal, for the moment we are only looking at the reverse
context, i.e., what purchasing & supply must do to keep its
suppliers satisfied.
Concerning purchasing & supply’s customer relationships with

other internal departments in the company, these will vary
enormously as each customer has a particular role to play. Some
of these various process relationships are illustrated in the
following table.
Figure 2.5-7
Process relationships between purchasing & supply and other departments
Department Possible areas of interaction
Research & ♦ Identifying the new technologies and materials required by the
Development organisation, and assessing their supply
costs and risks. ♦ Involving suppliers in product design.
Production and/or other Marketing &
user departments Sales
♦ Determining
Taking “makelong-term
or buy” decisions.
requirements based on marketing plans. ♦ Jointly
reviewing market conditions and trends. ♦ Reviewing costing.
items. ♦ Supply market research and

anising supplier input into
developing specifications and planning supply
uirements. ♦ Advising on order status and any follow-up actions
ded. ♦ Monitoring supplier performance.
♦ Making long-term forecasts of supply conditions for key supply
Legal ♦ Preparing contracts.

Department Possible areas of interaction
♦ Setting quality assurance standards for purchased items. ♦ Appraising quality management systems of
potential
Quality Management
suppliers. ♦ Carrying out acceptance testing. ♦ Monitoring performance of items and of suppliers’ quality
management systems.
♦ Forecasting customer demand based on supply conditions.
Customer Support
♦ Reviewing customer satisfaction with purchased items.
Maintenance ♦ Reviewing performance of purchased items.
♦ Developing cost estimates & standard costs. ♦ Preparing budgets.
Finance and Accounting
♦ Undertaking financial appraisals of suppliers. ♦ Recording expenditure commitments and contracts with
suppliers. ♦ Authorising invoices and expediting payments.
Information systems
♦ Reviewing data processing requirements and technologies. ♦ System integration with other functions and
electronic
commerce linkages with suppliers.
♦ Informing the public about the application of corporate goals Public relations
and policies (e.g., in the social and environmental areas) in the context of sourcing supplies.
Despite this range of relationships, there is likely to be some commonality in what these various
departments require from purchasing & supply. Some outcomes will be quantitative and
specific, such as lead-time reduction in certain processes handled by purchasing & supply (e.g.,
authorising invoices for payment by finance and accounting). On the other hand, other
outcomes will be qualitative. For instance, internal process customers will seek outcomes
relating to collaborative planning, sharing of information and participation in cross-functional
teamwork.
Purchasing & supply is likely to want to identify performance outcomes specific to at least some
of its main internal customers.
♦ Top management
It is highly important for purchasing & supply to develop a close relationship with top
management. The corporate-level outcomes that we have referred to earlier are specifically
targeted at top management. Again, some qualitative outcomes could be added to this list, such
as:
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✓ The closeness of the relationship between purchasing &
supply’s manager and senior executives in the company.
✓ The extent to which purchasing & supply’s manager is
integrated into top management’s strategic planning and decision-making processes.
Whichever outcomes purchasing & supply chooses to focus on in connection with the needs of
top management and its relationship with senior executives, evaluating performance against
these is going to be one of the function’s highest priorities.
❑ Assessing performance outcomes by purchase area
The Supply Positioning Model that we reviewed earlier will serve as the basis for determining
whether
External
Internal Outcomes
Environ-
Purchasing &
Functionalsupply ment
Customeroutcomes will need to be
Corporate developed for specific
Suppliers purchase areas. The choice will depend on the

Processes
expenditure value of the Inputs purchase area, as well as on its impact/ supply opportunity/
Availabi- lity

Infrastructure
National
Lead-time/ delivery
Corporate
Quality
Customer service
People
Buyer
Cost
Effectiveness
risk assessment.
The outcomes selected at this level will be similar to the function-level outcomes seen
previously. There will, however, be differences in what to look for from one purchase area to
another. For instance, the cost performance criteria for purchasing of capital goods should
clearly focus on the total cost of acquisition, whereas for purchases of other items such as
energy and raw materials the evaluation is likely to remain at the level of the delivered price.
Also, assessing the supply performance of services will be quite different to doing so for goods.
The Supply Positioning Model can be broken down into four quadrants, as shown in the
following figure.8
8 See Module 4 – Developing Supply Strategy.
Purchase
Efficiency
Supplier
Process
Figure 2.5-8 The Supply Positioning Model: 4 types of purchase items
H
Impact/
MBottleneck
Critical supply opportunity/ risk rating
Routine
L
Leverage
N80% of items = 20% of value 20% of items = 80% of value
Expenditure
Depending on their levels of expenditure and their impact/ supply opportunity/ risk rating,
purchase areas and items will fall into one quadrant or another. The buyer’s supply strategy in
each case will vary.9 For instance, in the case of routine items, the focus will be on reducing
purchasing administrative costs. In the case of leverage items, the main concentration will be on
reducing the delivered price. For bottleneck items, the buyer will want to reduce supply risk by
ensuring continuity of supply and by protecting quality. For critical items, where both
expenditure and supply risk are high, supply strategy will concentrate simultaneously on
reducing cost while securing quality and continuity of supply. This last category is where most of
the partnership- type relationships with suppliers will develop.
Because of these differences in focus of supply strategy, the performance criteria that
purchasing & supply will look for in each case will necessarily also have to vary.
In short, each company will have to assess its particular situation to determine to what extent it
needs to bring the evaluation down to the purchase area level and, if it does, which purchase
areas to assess and what to look for.
❑ Assessing performance outcomes by supplier
We have just seen how the
External
Internal Outcomes nature of the buyer-supplier relationship can vary.
Environ-
Purchasing & supply ment
Customer Essentially the same criteria that we have reviewed earlier
Suppliers
FunctionalAvailabi- lity

Infrastructure
National
Lead-time/ delivery
Corporate
Corporate
Quality concerning suppliers as customers would also apply

Processes
Inputs People
Customer service
Buyer
Cost
9 See Module 4 – Developing Supply Strategies

Effectiveness

Purchase
Efficiency
Supplier
Process
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Trade Centre
in the reverse context, i.e., in terms of assessing suppliers as providers of the goods and
services required by the purchasing company.
Suppliers with whom a partnership-type relationship is being developed, for instance, would
normally be assessed against criteria such as:
✓ Degree of collaboration and of long-term focus.
✓ Level of trust and of personal relationships.
✓ Extent of involvement in joint assessment and reduction
of costs.
✓ Degree of information sharing to promote optimal
decision-making.
✓ Participation in joint investments to improve the
efficiency and effectiveness of doing business.
✓ Resolving disputes through discussion.
As we have seen, these would tend to be suppliers of critical purchases. Suppliers of bottleneck
items would be assessed against their readiness to assure quality and continuity of supply.
Suppliers of leverage items would be assessed mainly against price and cost. Finally, suppliers
of routine purchases would be evaluated in relation to their willingness to offer services aimed at
reducing the buyer’s administrative burden of purchases, e.g., through accepting purchase
cards, long-term call-off agreements, purchases over the Internet, decentralised direct
purchasing by end-users, consolidated billing, etc.
There are various methods of quantitatively assessing suppliers. We will look at these later,
when we come to performance indicators, measures and targets in Unit 3.
❑ Assessing performance outcomes by process
Each process in purchasing &
External
Internal Outcomes supply is a contributor to its overall performance. It is an interlinked part of the total
Environ- ment
Purchasing & supply
FunctionalCustomer
Availabi- lity
satisfaction Customer Lead-time/ delivery Corporate process.

Suppliers
Quality
Processes The main processes are Inputs illustrated in the following figure.
People Supply
Infrastructure
National Corporate
Customer service
Buyer
Cost
Effectiveness

Purchase
Efficiency
Supplier
Process
Figure 2.5-9
Specifying requirements & planning supply
Analysing
Developing supply
supply markets
strategies
Appraising suppliers
Obtaining
& selecting offers
Preparing Negotiating
the contract
Each process will contribute positively or negatively to the function-level outcomes that we are
considering in this Module. For instance, each may add cost or create a saving. Each may
increase, or shorten, the lead-time. Having stock or not may determine the availability of supply
of an item.
Each process will involve interactions with customers, be they users, process customers or – on
occasion – top management. Through its interactions with customers, each process is likely to
contribute to increasing or decreasing these customers’ levels of satisfaction.
As before, the main issues to take into account at this level are to set priorities for measuring
performance and which kinds of performance criteria to apply.
In this regard, the processes to focus on should be those that potentially would contribute most
to the function-level outcomes and which have the highest levels of interface with customers.
Consider, for instance:
♦ Specifying requirements and planning supply. In addition to
being the starting point for all other processes (remember the saying: “well begun is half done!”),
this requires substantial purchasing & supply interaction with users and often also involves
suppliers. This process can be time-consuming but also particularly serves to add value through
improving quality at the source.
♦ Negotiating. The process of negotiation is a critical point in the
relationship between the buyer and the seller. Much is settled at this stage that determines
future performance outcomes.
♦ Managing inbound logistics. This process can have a very
important effect on availability, lead-time and cost, especially where imports are concerned. For
some import items, the added cost can be 30 percent or more, and lead-time extended by many
weeks, or months. Quality outcomes can also be affected through damage in transit.
While each and every process is, of course, relevant to the end result, some processes are
more significant than others. As before, each
Managing
the supply contract
Managing inbound logistics
Managing inventory
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company’s actual situation will determine what has to be concentrated on.
❑ Assessing performance outcomes by buyer / purchase team
People are the essence of the purchasing & supply function.
External
Internal Outcomes They can either make it work

Environ-
Purchasing & supply Functional effectively for customers, or turn
ment
Customer it into an island of “follow-the- procedure” inattention to real

Suppliers
satisfaction Customer Corporate
needs. They can either make it a

Processes proactive service that seeks to interact continuously with customers, identify opportunities
Availabi- lity
Supply
Infrastructure
National
Lead-time/ delivery
Corporate
Quality
Buyer
Cost
Effectiveness
and prevent problems before they happen, or convert it into a passive and reactive operation
that waits for users to call and spends much of its time “putting out fires”.
Virtually every outcome that is achieved by purchasing & supply corresponds, therefore, to the
outcomes of its staff. And because staff are people, each individual’s performance will naturally
be different.
Because individual performances may vary substantially, it is important to determine what these
are in order to know what to do about this. A staff member performing poorly may need training,
or more motivation, or better tools. If this does not work, the staff member may be re-deployed
to another unit of the company, or asked to leave, if his or her performance is unable to meet
the requirements of the job.
Without mechanisms to identify individual levels of performance, however, this is very difficult to
do. That is why this level of performance evaluation can be particularly important. It is also
particularly difficult to do. This is because the aggregate of each individual’s outcomes is
inevitably going to be both quantitative and qualitative, objective and subjective, measurable
and non-measurable.
In theory, it is not necessarily difficult – through statistical analysis – to arrive at comparative
conclusions regarding each individual buyer’s achievements. This could involve averaging, e.g.,
prices paid, supply lead-times, rejection rates due to insufficient quality, etc. The main problem
is that each buyer may be dealing with completely different situations, different groups of
products, different suppliers and different customer requirements. How can these be compared
one-on-one?
One option to avoid this incomparable diversity could be to assign purchase requisitions to
buyers on a random basis, so that these differences ironed themselves out. However, this would
deny each buyer the possibility of specialising in certain areas that make best advantage of his
or her particular expertise.
An added complexity comes about when buyers work in teams on more important purchases. If
the whole team is responsible for the outcome, how to measure the contributions of each
individual? And how to evaluate the performance of the purchasing & supply manager, who
Purchase
Efficiency
Supplier
Process
MLS
does not necessarily buy anything but does supervise the whole of the
team?
Figure 2.5-10 The complexity of

evaluating staff performance
P&S
manager
Staff /
teams
Despite these difficulties, staff performance evaluation is – as we have

stated before – a very important dimension of assessing the function’s
performance. Although these problems are real, individual performance
criteria developed along the lines of the function-level outcomes we have
described earlier can nevertheless provide an objective assessment of the
ultimate contribution of each staff member and of each team. As we will
see in the next Unit, these outcomes can be measured and be the object
of precise targets. As the manager must be ultimately in charge of the
function as a whole, he or she must assume responsibility for the
collective set of outcomes.
These will be the objective performance indicators. These are also called
the “hard” factors. However, alongside these is a range of “soft” factors,
i.e., dimensions that are difficult to evaluate quantitatively. This does not
mean that they are less important. On the contrary, they can sometimes
be the most important staff evaluation criteria of all. What is the advantage
of a buyer who outperforms all others in quantifiable outcomes but is
destructive in personal relations and therefore undermines the
achievements of the whole group?
considering these “soft” performance criteria
the later,
success
when
or failure
we of P&S staff in achieving the “hard” functional
the internal management of the purchasing outcomes
& supplythat
function
we are considering here.
ut. These “soft” criteria are the ones that ultimately determine 2.5-6

International MLS
Trade Centre
2.6 Performance Related to Internal Factors
objectives
We will now look at performance areas and issues that are internal to the enterprise and which
influence the achievement of the outcomes described earlier. They
External
Internal Outcomes
therefore relate to why a particular level of performance
Environ-
Purchasing &
Customer has been attained. These 2.4 The performance
management model
factors fundamentally respond to questions such as the
2.5 Performance
following: Inputs outcomes
♦ What is being done?
Availabi- lity

Infrastructure
National
Corporate
Suppliers
Purchase
Lead-time/ delivery
Corporate Quality
Processes
Customer service
People
Buyer
Cost
Efficiency
Effectiveness 2.6 Internal factors
♦ How is it being done?
♦ How much is it being done?
These performance areas reflect the internal management activities 2.8 Conclusion & refocus
being carried out within the purchasing & supply function, as well as the on suppliers
outputs that are produced by these activities. They are, by definition, largely under the control of
the purchasing & supply function.
Examples of outputs are the amount of money spent on purchases, the volume of
communications, the number of various types of documents issued (e.g., purchase orders), etc.
Measuring and evaluating performance serves to determine, amongst other things, the extent to
which a favourable causal relationship exists between the way in which the purchasing & supply
function operates (i.e., what, how and how much is done?) and its outcomes (i.e., what for?).
Internal management activities and outputs relate to four interrelated areas, as illustrated in the
following figure.
Figure 2.6-1
Managing the purchasing & supply processes
Supplier
Process
Managing Managing the the

Managing the purchasing purchasing & &
purchasing & supply supply
supply infrastructure infrastructure
processes
•What •What •How •How •How •How is is much much is is it it done?
done?
done? done?
is is it it done? done?
Managing Managing the the purchasing purchasing & & supply supply people
people
Managing Managing the the company’s company’s suppliers suppliers
Each of these areas is influenced by all of the others. An effective purchasing & supply function
requires all four groups of factors to be right. If one or more are sub-optimal, the overall
performance of the function will suffer. Thus, for instance, managing people well will not in itself
result in good performance if the function’s infrastructure, its processes and its suppliers are not
also well managed.
a) Managing the infrastructure
The internal infrastructure factors that can influence purchasing & supply’s performance include
the following:
External
Internal Outcomes
Environ-
Purchasing &
♦ Clarity and
Customer
appropriateness of the
Suppliers
Corporate
purchasing & supply objectives and targets.

♦ Appropriateness of the
purchasing & supply
Availabi- lity

Infrastructure
National
Purchase
Lead-time/ delivery
Corporate
Quality
Processes
Customer service Inputs
People
Buyer
Cost
Efficiency
Effectiveness
function’s structure.
♦ The function’s IT support systems
♦ Purchasing & supply policies
♦ Purchasing & supply procedures and supporting tools &
techniques.
❑ The purchasing & supply objectives & targets
The following issues will need to be managed to ensure effective purchasing & supply’s
performance:
♦ The extent to which the purchasing & supply objectives and
targets are aligned with the corporate strategy, and follow the guidelines described earlier in this
Unit.
♦ The extent to which these objectives and targets are well
understood within the purchasing & supply function and across the organisation.
❑ The purchasing & supply function’s structure
Here, the following issues will need to be considered:
♦ Is the function organised by product line, by project, or by type
of purchase, and is this the most appropriate way?
♦ If customer support is critical, do the organisational
arrangements allow buyers to service customers on a personalised basis (e.g., acting as
“account managers”).
Supplier
Process
TARGETS
International MLS
Trade Centre
♦ Does the structure support the focused management of key
suppliers, as opposed to having many individual buyers dealing with suppliers in an unco-
ordinated manner?
♦ Are the individual purchasing & supply roles within the function
clear? Do role profiles exist?
❑ The function’s IT support systems
Where the organisation does not have an all-encompassing IT strategy that imposes a particular
system on purchasing & supply, the function may have reasonable freedom to select its own IT
software solutions. In this case, the matter can be considered internal to the function, and
managed accordingly. The freedom to choose hardware independently may be less likely, as
this would tend to be standardised throughout the organisation.
❑ Purchasing & supply policies
The organisation should have policies that give guidance on how purchasing & supply activities
should, or should not, be carried out. Although top management will also ideally “own” and
confirm these policies, they should nevertheless be initiated and heavily influenced by the
purchasing & supply function.
The following policy-related issues will need to be well managed to ensure effective purchasing
& supply performance:
♦ Whether a purchasing policy exists, and has been
communicated throughout the organisation.
♦ How complete the purchasing policy is (e.g., if it covers
delegation of authority, separation of duties, obligations to comply with legislation, audit and
record keeping, ethical conduct, security and confidentiality, environmental and social
considerations, and so forth).
♦ The extent to which the established purchasing & supply policy
is actually followed within the company.
✔
❑ Procedures and supporting tools & techniques ✔✔
These are essential to ensuring effective purchasing & supply function performance. Here, the
following
External
Internal Outcomes issues need to be considered:
Environ-
Purchasing &
Functional supply
♦ The extent to which the
ment
Customer
procedures effectively
Suppliers
Corporate
operationalise procurement policy,
Processes
facilitate the achievement
Inputs
People
Buyer

Availabi- lity
Supply
Infrastructure
National
Purchase
Lead-time/ delivery
Corporate
Quality
Customer service
Cost
Efficiency
Supplier
Process
Effectiveness
Customer satisfaction
of purchasing & supply targets, and provide adequate control of processes without imposing
unnecessary constraints on purchasing & supply staff and on users.
♦ The extent to which the procedures are correctly followed.
♦ The availability and appropriateness of purchasing tools and
techniques, and the extent to which these are used. These may cover, for instance, value
analysis & value engineering methodologies, life-cycle costing, “how to” guides, registers of
standards, a framework for analysing supply markets, the use of the Supply Positioning Model,
standard forms and documents for use in invitations to offer, standard contracts, and so forth.
b) Managing the suppliers
Without suppliers, there is no purchasing & supply function. It is impossible, therefore, to
overemphasise the importance of the function’s relations with its suppliers. These relations
influence each and every one of the processes that we have just been considering.
❑ Supplier base
The first issue to consider in this regard is the size of the supplier base. An excessively large
supplier base will make it difficult for purchasing & supply to manage these relationships with
sufficient care. For this reason, most companies purchasing & supply functions take active steps
to reduce the supplier base. The suppliers that are retained will be assessed regularly regarding
their capabilities, their motivation to supply the company, and their supply performance.
In short, more and more companies are concerned with developing relationships with suppliers
that are more positive and long-term, rather than adversarial and short-term.
Despite this overall approach, however, not all relationships will be the same for all purchase
items. These different relationships will be reflected contractually, as illustrated in the following
figure.
Figure 2.6-2
The supplier-buyer relationship / contract continuum

Spot
Regular purchase
trading
Call-off contracts
Fixed contracts
Partner- ship
Joint ventures
Internal provision
2.6-1
You can see here that relationships with suppliers will tend to vary from
one-off (under spot purchases) to being very close (under partnerships
and joint ventures). This will depend on the position of the purchase item
on the Supply Positioning Model, seen earlier.10 Generally, the lower the
impact of the item on the company and its level of supply risk, the less
close will be the relationship.
For instance, in the case of suppliers of leverage purchase items (low risk
and high expenditure), the buying company’s supply strategy will usually
concentrate on obtaining the lowest possible price / cost through spot
purchases, irrespective of which supplier is involved. This will generally
mean changing suppliers as often as convenient. However, even in these
cases – if switching costs are high – changing suppliers continuously may
sometimes not be the best approach.
In the case of routine items (low risk and low expenditure), the focus of
the relationship will be on having the supplier accept to take on – and
lighten where possible – the administrative burden, in order to reduce the
buyer’s purchasing costs. This requires a closer relationship with the
supplier than would be the case with leverage items, and might involve,
for instance, a regular trading or call-off contractual arrangement.
As supply risk increases, bottleneck items (high risk and low

expenditure) will call for a much closer relationship, generally in the
form of a fixed contract to guarantee continuity of supply.
The closest relationships (partnerships and joint ventures) will usually be

reserved for suppliers of critical items, because they are both high risk
and high expenditure. In these cases, suppliers and the buyer are likely to
be involved in much sharing of expertise (e.g., in specifications
development), of information, of cost, and of risk. If this is not happening,
the partnership may exist on paper but it will not apply in practice.
In line with what has been said, you can well imagine that – in general –
the numbers of suppliers should progressively reduce when moving from
left to right along the above relationship continuum.
Assessing performance in managing suppliers will generally concentrate

on determining the degree of success of the buyer in reducing the supplier
base and in developing relationships with suppliers that are in harmony
with the nature of the purchase items that these suppliers are providing. If
these are not aligned, this will undoubtedly affect the outcomes achieved
by purchasing & supply.
❑ Transactions and communications
The quantity and quality of transactions and communications with

suppliers will be another measure of overall performance. These are
closely related to the nature of the supplier relationships, but have their
own particularities.
10 See Module 4 – Developing Supply Strategy.

Concerning transactions, for instance, good performance would usually involve close co-
ordination to synchronise production, on the one hand, and requirements on the other. The most
evident example of such an arrangement would be just-in-time (i.e., stockless) purchasing. If
this type of transaction can be developed in a way that is convenient to both sides, then supply
performance will likely be upgraded.
Communications that are clear, timely, measured and constructive will be another sign of good
performance in managing suppliers. Too many, or too few, communications might reflect a
problematic association. The balance must be right, and must reflect the desired kind of
relationship.
c) Managing the processes
There are a number of different processes and sub-processes managed by the purchasing &
supply function. The Modular Learning System is designed to address these comprehensively.
External
Internal Outcomes
Environ-
Purchasing &
Customer They include:
Corporate Suppliers ♦ Specifying requirements
& planning supply.
♦ Analysing supply
Availabi- lity

Infrastructure
National
Lead-time/ delivery
Corporate
Quality
Processes
Buyer
Cost
markets.
Effectiveness
♦ Developing supply strategy.
♦ Appraising and shortlisting suppliers.
♦ Obtaining and selecting offers.
♦ Negotiating.
♦ Preparing the contract.
♦ Managing the contract.
♦ Managing logistics.
♦ Managing inventory.
We will now consider some of the main factors that need to be managed within each of these
process areas.11
11 For more details on each of these areas, please see the corresponding MLS modules.
Purchase
Efficiency
Supplier
Process
2.6-2
International MLS
Trade Centre
❑ Specifying requirements & planning supply
Examples of what to consider: what is being done, how it is being
Sub-process
done, and how much it is being done Preparing product/service specifications
◆ Conditions under which different kinds of specifications are used, e.g.,
depending on the nature of the purchases. ◆ Whether specifications are specifically designed to be consistent
with
cost objectives – e.g., lowest total cost of ownership vs. lowest price. ◆ Extent of use of value analysis / value
engineering techniques. ◆ Extent to which development of specifications is the result of cross-
functional teamwork involving customers, the purchasing & supply function and, where relevant, suppliers. ◆
Extent to which corporate and functional policies have been taken into
account within specifications. ◆ Means used to assure specified quality levels. ◆ Frequency of review of
specifications. ◆ Extent to which new specifications are developed when equivalent
specifications already exist (i.e., the extent of internal standardisation). ◆ Conditions under which external
standards are used, as opposed to
developing in-house specifications. Extent to which information on such standards is obtained. Planning and
◆ Extent to which common requirements are aggregated – e.g., from prioritising supply
different functions or sister organisations. ◆ How budget information and purchase requirement forecasts are
obtained. ◆ Extent to which this information is known about in good time, as
opposed to being known about at the last minute. ◆ Extent to which past expenditure on different purchase
items is known. ◆ Extent to which the impact that different purchases have on the
organisation is known. ◆ Extent of knowledge of the degree of supply risk associated with
different purchases.
❑ Analysing supply markets
Examples of what to consider: what is being done, how it is
Sub-process
being done, and how much it is being done
Supply market
◆ Extent and frequency of supply market analysis that is being carried out. analysis
◆ Extent to which supply market analysis is limited to local markets, known
technologies, etc, as opposed to exploring wider markets and searching for new technologies.
◆ Conditions affecting the depth of analysis, e.g., whether scenario
analysis is used for critical purchases.
◆ Extent to which supply market analysis is organised as a cross-
functional exercise (because involving other relevant functions will increase the chances that the findings will
be acted upon).
Access to supply market information
◆ Extent to which supply market information (e.g., on market price
movements, exchange rates, tariff rates, transport rates) is obtained, and how up-to-date the information is.
❑ Developing supply strategy
Examples of what to consider: what is being done, how it is
Sub-process
being done, and how much it is being done
Definition of
◆ Degree of rigour and consistency of approach in defining supply targets individual
and supply strategy. supply strategies
◆ Extent to which individual supply strategies are tailored to specific
purchases depending on their nature (e.g., value, impact on the company and supply risk). Extent to which the
Supply Positioning Model is being used.
◆ Extent to which supply strategies for individual items fit in with overall purchasing & supply strategy, product
line / project strategy, and organisation / functional policies.
◆ Extent to which supply strategies clearly define the kinds of relationships
to be developed with suppliers in each case.
◆ Conditions affecting the frequency of review of supply strategy (e.g., if it is higher in a fast-moving supply
market environment than in one that is mature).
◆ Extent to which supply strategies are clearly understood by everyone
involved.
Implementation
◆ Extent to which supply strategy is reflected in contracts and in the of supply strategy
contract implementation (see also the section below on managing the contract).
❑ Appraising and shortlisting suppliers
Sub-process
done, and how much it is being done
Identifying potential suppliers
◆ Degree of rigour in the search for potential suppliers. Extent to which all
potential sources of information are being used.
Appraising
◆ Conditions under which different degrees of rigour and effort are spent suppliers
on appraising suppliers (e.g., depending on the nature of purchases).
◆ Consistency of approach to supplier appraisal, e.g., extent to which the
Supplier Perception Matrix is being used.
◆ Conditions under which different supplier appraisal criteria are used
(e.g., depending on the nature of the purchases).
◆ Conditions under which different methods are used to gather information
for appraisals (e.g., using published information vs. questionnaires vs. visits vs. a combination of these)
depending on the nature of the purchases.
◆ Extent to which appraisals are properly documented and auditable.
◆ How frequently suppliers are appraised.
Communicating
◆ The extent to which the results of supplier appraisals are readily the output
available to purchasing & supply staff and to the rest of the organisation, e.g., via a list of approved or
registered suppliers.
International MLS
Trade Centre
❑ Obtaining and selecting offers
Sub-process
done, and how much it is being done.
Selecting suppliers to be invited to quote/tender
◆ Whether there is an up-to-date approved supplier list.
◆ Ease of identifying appropriate suppliers. For instance, whether there is a
computerised supplier database to identify appropriate suppliers based on given criteria (e.g., product type,
minimum turnover, minimum capacity, previous supplier performance, etc.).
Enquiry/tender
◆ Conditions under which different methods are used to invite suppliers to process
offer (e.g., a mix of informal approaches, enquiries, open and restricted tendering, etc., depending on the
nature of the purchases).
◆ Depth of enquiry, comprehensiveness of invitation documents and
number of suppliers invited to offer, depending on the nature of the purchases (consistent with the purchase
item’s position on the Supply Positioning Model).
◆ Content of the enquiry / tender documents being used.
◆ Conditions under which different supply options are used when inviting
suppliers to offer (e.g., requiring both FOB and CIF quotations in order to be able to better establish who should
be responsible for shipment)
◆ Extent of compliance with ethical policy (e.g., relating to transparency, fair
treatment of suppliers, conflicts of interest, confidentiality, etc.).
Evaluating &
◆ Extent to which selection criteria, criteria weighting, and the process of selecting offers
selection have been established before enquiries / tenders are issued.
◆ Conditions under which different offer selection criteria are used (e.g.,
depending on the nature of the purchases.)
◆ Extent to which the total cost of ownership of different offers is being
assessed.
◆ Extent to which discounted cash flow methods (e.g., Net Present Value)
are used to assess offers relating to high-cost / long-life requirements.
❑ Negotiating
Sub-process
done, and how much it is being done.
Pre-negotiation
◆ Extent to which negotiations are planned and specific negotiation targets planning
and strategies are set.
◆ Extent to which negotiation strategy reflects supply strategy for the items
being negotiated.
◆ Extent to which the roles and levels of authority of negotiators are set and
clearly understood.
Negotiation ◆ Conditions and circumstances under which different negotiation methods and techniques are
used (including taking account of the approach being used by the other side in the negotiations).
◆ Extent to which negotiation strategy has focused on “win-win” approaches.
Post-negotiation ◆ Extent to which negotiated outcomes are well documented (to avoid later
misunderstandings).
◆ Extent to which post-negotiation meetings take place to review
effectiveness, and help to learn from the negotiation process.
❑ Preparing the contract
Sub-process
Developing the
◆ Extent to which written (as opposed to oral) contracts exist. contract
◆ Extent to which industry standard forms of contract are used.
◆ Extent to which contracts are based on the buyer’s vs. the supplier’s
terms.
◆ Extent to which contracts reflect the desired supplier relationship and the supply strategy for the item(s) (e.g.,
whether they are incentive-based or punitive).
◆ Extent to which appropriate terms are built into the contracts relating to, e.g. continuity of supply, price
revision formulas, dispute resolution mechanisms, etc.
◆ Extent to which contracts have to be modified later.
International
◆ Conditions under which the different Incoterms are used. contracting
◆ Appropriateness in the designation of the law governing the contract.
◆ Appropriateness of payment terms when buying internationally.
◆ Extent to which exchange rate risk is managed effectively in the contract.
◆ Availability of guidelines and specialist legal advice when contracting with
suppliers in different countries.
❑ Managing the contract
Sub-process
Post-award ◆ Extent to which performance bonds and guarantees (where called for in
the corresponding contracts) are sought and filed.
◆ Extent to which contractual arrangements are communicated internally
(e.g., to users and to internal process customers).
Contract
◆ Extent to which contract implementation risks are identified and performance
managed. management
◆ Extent to which schedules and/or project plans (where relevant) are
prepared.
◆ Extent to which quality plans are developed, and specific actions taken to follow-up on these (e.g., whether
inspections are being followed through, or waived through lack of resource availability).
◆ Extent to which contract management activity is focused and prioritised
(e.g., expediting takes place only where on-time delivery is critical and high risk).
◆ Extent to which supplier performance is monitored and recorded (for contract purposes and to assist with
future sourcing decisions).
◆ Extent of interactions between the buyer and suppliers (e.g., frequency
of review meetings).
Change
◆ Extent to which changes are formally agreed between both sides to a management
supply contract before being acted upon.
Sub-process Examples of what to consider: what is being done, how it is being

Claims and dispute resolution
◆ Extent to which disputes arise, and are resolved amicably vs. escalating
to involve third parties.
Payment ◆ Extent to which payment is authorised only when a competent person
has established that the supplier has met its contractual obligations.
◆ Extent to which payment duties in the company are separated from
contracting duties (e.g., ensuring that the person responsible for making payment is not the same as the
person who placed the contract).
◆ Payment methods, efficiency and excess costs.
❑ Managing logistics
Sub-process
Inbound transportation
♦ Extent to which shipments are made on an FAS/FOB or CFR/CIF basis.
♦ Extent to which inbound transport is consolidated in terms of numbers of
shipments, cargoes, carriers and entry points.
♦ Extent to which sufficient attention is given to assessing transport
alternatives.
♦ Extent to which logistics lead-times are monitored and acted upon.
♦ Ability to track shipments in transit.
♦ Extent of use of containers in transport.
♦ Extent to which all import-related documentation is completed and
available on time.
♦ Conditions under which different transport insurance arrangements are
being made.
Interstores distribution
♦ Factors that are systematically considered when determining the
company’s warehouse locations.
♦ Factors influencing how interstores transport is organised (e.g., routing,
vehicles used, frequency of deliveries, etc.).
♦ Conditions under which in-house and/or external interstores logistics
management services (and fleet) are being used.
♦ Extent to which load factor is considered in planning the use of the
company’s own fleet.
❑ Managing inventory
Sub-process
Warehouse
♦ Factors that are considered when deciding on warehouse design and operations
facilities.
♦ Extent of investment in warehouse equipment and handling facilities.
♦ Practices being used for storing items received at warehouses.
♦ How picking is planned and carried out.
♦ Warehouse space utilisation and space efficiency.
Inventory
♦ Extent to which demand forecasting of stocked items is carried out. planning and management
♦ Extent to which stock is categorised into different groups to facilitate
prioritisation and approach to management. Methods used for this purpose.
♦ Effort being made, and approaches used, to determine order quantities
and establish re-order levels and frequencies.
♦ Ability and methods used to audit discrepancies between stock records
and physical stock.
♦ Extent to which specific measures are being applied to reduce the variety
of stocked items.
♦ Frequency of review of safety stock requirements.
♦ Levels of stock kept in stores.
♦ Extent to which customers are informed of stock and delivery positions.
♦ Methods that are being used to identify and deal with obsolete stock.
d) Managing the people
Purchasing & supply’s staff must be appropriately skilled to effectively undertake these various
processes, such as specifying requirements and planning supply,
External
Internal Outcomes
Environ- ment
Purchasing & supply
Functional
Customer
Availabi- lity

Infrastructure
National
analysing supply markets,

Corporate
developing supply strategies, and so forth.

Inputs Suppliers Processes
People
Lead-time/ delivery
Corporate Quality
Customer service
Buyer
Cost
We have previously referred to the “hard” outcomes that can be evaluated at the level
Effectiveness
of individual performance. Now, as we pointed out earlier, we will be looking at the “soft” factors.
These “soft” performance criteria are generally behavioural in nature. In other words, they can
be seen expressed in day-to-day work. They may include things like demonstrations of creativity
and innovation, initiative, persuasion and negotiation skills, problem-solving attitudes, teamwork
and interpersonal relations, willingness to accept responsibility, decision-making skills,
communication abilities, and customer-service orientation. The purchasing & supply manager
must demonstrate these
Purchase
Efficiency
Supplier
Process
2.6-3
same qualities while also showing vision, leadership, organisational

skills, and the ability to direct and coach others.
A major outcome that influences most of these other outcomes will be

the degree of staff motivation and job satisfaction. A well-motivated staff
will be a good sign that things are going well. Staff who are unhappy or
unsatisfied will almost certainly reflect a very negative outcome.
All of these dimensions are difficult to pinpoint and to measure, although

they clearly have an important effect on the function’s overall outcomes,
both immediate and in the long-term.
Because these factors are so subjective, it is sometimes best to have

each individual evaluated by more than just one other person. If this is not
the case, then excessively friendly or unfriendly relations between the
individual evaluator (e.g., the supervisor) and the person being evaluated
might distort the assessment. It might be best, therefore, for each buyer to
be evaluated by a small team made up of the supervisor, a colleague and
one or two customers. Collecting the views of others (e.g., suppliers)
might be another important part of the evaluation.
The purchasing & supply manager might be evaluated not only by his or
her supervisor, but also by other colleagues in the company and by
members of the purchasing & supply staff.
❑ Defining roles and responsibilities
Of course, not all people will need to be competent in all processes. This
will depend on how the purchasing & supply function is structured, and
therefore on the requirements of each individual role. For instance,
different situations may require the use of:
♦ Generalists serving the overall supply needs of one or more

clients.
♦ Specialists in particular functional areas, e.g., in value

analysis, supplier appraisal, negotiating & contracting,
logistics, inventory management, and so forth.
♦ Specialists in particular kinds of purchases, e.g., in capital

equipment, materials, components, services, commodities, etc.
What is important here is for each staff member to have clearly defined
roles and responsibilities, however these may be determined. Without
clarity in this regard, performance is likely to suffer.
❑ Team organisation
Team-based work is of growing importance in most companies. This

allows competences and experiences to be shared to achieve a common
purpose. In theory, teams are an ideal way to work. However, many times
teams fail. This may happen because, for instance:
♦ Team goals and roles are not well defined.
♦ Decision-making processes are unclear.

MLS
♦ Clashing personalities and unresolved differences of view.
♦ Lack of team empowerment.
♦ Inappropriate tools.
Often, decisions on setting up teams are imposed from above, without

due involvement and commitment by the team members.
Unless team organisation is well done, it will cause failure rather than
success, and damage the chances of obtaining the desired outcomes.
Assessing how purchasing & supply’s teams work will therefore help to
explain the reasons for the performance outcomes that the function is
achieving.
❑ Capabilities and training
The purchasing & supply manager must ensure that, having defined a role
for each staff member, he or she has a suitable combination of the right
knowledge, skills and attitude:
♦ Knowledge. This means knowing

what has to be done to perform
effectively and efficiently.
♦ Skills. This means knowing how to

put this knowledge into practice.
♦ Attitudes. This means having the right approach to dealing with

situations and problems, and wanting to apply the knowledge
and skills that have been acquired.
In additional to professional knowledge and skills specifically in the areas

of purchasing & supply, a number of other skills will be required by staff.
These will include, for instance, skills relating to conceptualising
processes and systems, planning and organising work, analysing and
solving problems, making decisions, working as part of a team, developing
effective interpersonal relationships with colleagues and customers,
making effective presentations, and others.
In this regard, purchasing & supply will need to be able to asses which
practices and abilities are required and to what extent, for instance, when:
♦ Identifying and recruiting people with the right knowledge, skills

and attitudes.
♦ Providing them with appropriate guidance, coaching and

training.
The amount of training provided to staff, and the nature and range of
this training, will therefore be an important indicator of internal
performance.

International MLS increases or bonuses, added resp
Trade Centre
recognition for a job well done.
❑ Staff motivation & job incentives
The extent of these job incentives and how they are being applied can
also
Whilehelp to the
all of explain
abovethefactors
causes ofinevitably
will favourable or unfavourable
influence staff and
staff motivation
performance outcomes.
job satisfaction, other job incentives may be necessary. These may include
2.6-4
opportunities for promotion and professional development, salary
e) Efficiency: the bridge between inputs and outputs
The four areas that we have just covered (i.e., infrastructure, processes,
suppliers and people) each produce outputs. These outputs, in turn,
produce the outcomes that we have referred to earlier. While we have
already considered some examples of outputs, let us repeat these here
while adding a few more in the light of what we have been reviewing in the
last few pages.
Figure 2.6-3
Some examples of purchasing & supply outputs
♦ Amount of money spent on purchases.
♦ Number of purchase orders issued.
♦ Number of specifications changed through value analysis.
♦ Number of supply targets developed.
♦ Number of hours of people training implemented.
♦ Number of communications with suppliers.
♦ Number of purchase items eliminated through variety reduction

programmes.
♦ Quantity and value of stock reductions.
♦ Number of suppliers with whom partnership arrangements

have been developed.
All of these outputs – which, as you can appreciate, are highly quantitative
– must be achieved as efficiently as possible. Efficiency is about resource
utilisation – predominantly people and money. These inputs must be well
managed in the process of achieving purchasing & supply’s outputs. We
will shortly be looking more closely at the different kinds of inputs.
Ultimately, efficiency will be evaluated in terms of the total cost of

operating the purchasing & supply function in relation to what it has
produced.

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MEASURING AND EVALUATING

MODULAR LEARNING SYSTEM IN

Measuring and Evaluating

International Trade Centre (ITC)

© International Trade Centre (ITC)2000

Ed. 2006 / Print. Sept. 2010

Unit 1 corporate level outcomes ...................................................

3.2-1 If you can't measure, you can't control... .................................................. 86 3.2-2

Module 12: Contents iii

This Module focuses on how to measure performance. This is a key area

The Coursebook for this Module is made up of a series of Units. Each of

♦ Learning Objectives: the knowledge and skills you will have

♦ Key Points: highlights of particularly important issues.

♦ Definitions: explanations of concepts and specialised terminology

♦ Figures: a variety of graphical and visual presentations of concepts

♦ Action Points: these are practical exercises and applications of

♦ Learning Checks: these are self-assessment checks at the end of

Unit 5 Performance of Integrated SCM tr

Sequence of cause and effect

Key evaluation indicators

♦ Take account of the different kinds of

♦ Allow for management control, to

♦ Contribute to effective decision- making not only

♦ Take account of the external environment as well as the

♦ Ensure broad-based participation in determining what is to be

♦ Build in an effective feedback process that is both timely and

♦ Be adaptable to changing circumstances and requirements.

♦ Measure results against established targets, standards,

♦ Be simple, and include as few measures as possible that,

♦ Include a balance of quantitative and qualitative measures.

♦ Not be so costly that this cancels out any savings or other

♦ Link actions and their results, so that causality can be clearly

There is no single best performance evaluation system applicable to

4 Module 12: Unit 1

❑ Motivation The targets are not realistically a

If performance evaluation is not motivating, this will cause people to try to

An example: the cost of reducing cost

An example of a de-motivating and self-defeating target could be one that

6 Module 12: Unit 1

♦ Allow other key supply performance factors to deteriorate (e.g.,

♦ Use “creative accounting” to give the appearance of cost

❑ Being able to “sell” purchasing & supply within the company

It is often argued that the marketing function in an organisation is valued

“Seeing is believing” is a common human reaction. Unless purchasing &

These points illustrate the importance of getting the performance

Unit 2 The Performance Evaluation

Figure 2.1-1 The performance evaluation process

measurement Collecting the data

2 ♦ To ensure that everyone perceives the results of the evaluation

1 See also Module 1 – The Corporate Environment.

Examples of purchasing & supply objectives

♦ Ensure customer satisfaction (in terms of, e.g., availability,

♦ Secure continuity of supply of the inputs needed to meet the

♦ Contribute through supply of inputs to the differentiation of

♦ Through supply of inputs, work to reduce the company’s

♦ Contribute to innovation and developing the company’s

♦ Help the company to focus on its core competences through

♦ Assist the company in making relevant make-or-buy

♦ Contribute to corporate development and growth by

♦ Help in assessing alternative corporate strategy options by

♦ Contribute to total quality management in the company.

♦ Contribute to total cost reduction in company operations.

Module 12: Unit 2 13

In a commercial enterprise, the users will generally be external to the