Basics of procurement management Dep't of LSCM

Chapter Eight
Contract Management and Performance Measurement
8.1. Contract management
A Contract has been defined as “An agreement, enforceable by law, between two or more
competent parties (legal entities) to perform or not to perform a specific act or acts for a
consideration.
A procurement contract means a contract between the procurement entity and a supplier,
contractor or consultant resulting from procurement proceedings.
Contract Management is commonly understood as a broader and more strategic concept that
covers the whole procurement cycle including planning, formation, execution, administration
and close out of a contract and goes beyond the day to day “administrative” activities in the
procurement cycle”
Although the actual planning begins during the selection process, Contract Administration
actually starts upon the signing of the contract, which is the point at which the parties to the
contract are bound by its terms and conditions. As with contract management, contract
administration ensures that each party adheres to the contract and performs at or above the levels
specified in the contract. Contract management is relationship focus, strategic, process
development, and longer term time frame, holistic view, driven by added value.
If we compare the nature or characteristics of the activities associated with both contract
management and contract administration then we can see that the differences are fundamental,
yet without efficient contract administration, and then effective contract management becomes
very difficult, if not impossible.
8.2 A balanced performance measurement system
The Balanced performance level provides a good balance between performance and cost savings
for most workloads, including those that perform random I/O such as boot volumes. Block
Volume Size and Performance: The following table lists the Block Volume service's
throughput and IOPS performance numbers based on volume size for this option. IOPS and KB/s
performance scales linearly per GB volume size up to the service maximums so you can
predictably calculate the performance numbers for a specific volume size. If you're trying to
achieve certain performance targets for volumes configured to use the balanced performance
level you can provision a minimum volume size using this table as a reference.
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Balanced Performance Measurement Systems and Manager Satisfaction Constituting factors of

balanced performance measurement systems Performance measures can be defined as metrics
which quantify the efficiency and effectiveness of a business. As opposed to an aggregation of
stand-alone performance measures, a performance measurement system consists of performance
measures which are explicitly related to each other.
Accordingly, a performance measurement system is more than just a simple set of performance
measures. A performance measurement system demands a systematic link between the
performance measures, either in a mathematical way or in terms of a descriptive cause-effect
relationship. As a consequence, the degree of how systematically the performance measures are
linked is the defining trait of a performance measurement system. For example, the Balanced
Scorecard is said to consist of performance measures which are systematically linked.
On the other hand, the performance measures of the Balanced Scorecard are not mathematically
linked, but rather by descriptive cause-effect relationships. One major critique of traditional
performance measurement systems concerned the emphasis they placed on financial measures.
Financial measures are reporting the financial outcome of activities and thus are lagging
measures. Traditional performance measurement systems tend to neglect the drivers of the
(future) financial outcomes, so called leading measures.
However, a balanced performance measurement system focuses not only on one or a few aspects
of the business, but rather takes a comprehensive view. This type of performance measurement
system encompasses performance measures which address all important aspects of the business.
If a performance measurement system consists of both lagging and leading measures and instead
of focusing only on single aspects of the business it is balanced. The degree of balance is a
second major factor for describing and classifying performance measurement systems. By using
these two factors - the degree of the performance measures' systematic linkage and the degree of
their balance - performance measurement systems can be specified more accurately than just by
asking managers whether they have a performance measurement system or not. Using a 2x2-
matrix, a performance measurement system can be categorized according to four different types.
The degree of the performance measures’ balances low or high low high Classification of
performance measurement systems. One of the oldest and most widely used performance
measurement systems is the Return on Investment-system. The center piece of this performance
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measurement system is the return on investment. This pivotal performance measure is

mathematically split.
The product is a pyramid of performance measures. Though the DuPont-performance
measurement system is characterized by a high degree of the systematic linkage of performance
measures, it consists only of financial measures. Thus, the performance measures of the Du Pont-
performance measurement system have only a low degree of balance (cell 1). Cell 2
characterizes a balanced performance measurement system.
The performance measures of a Balanced Scorecard can be considered to have a high degree of
balance as they cover several perspectives. The proposed perspectives - financial, customer,
internal business, learning and growth - are organized along the value chain and thus cover all
important aspects of a business.
8.3. Performance measurement: effectiveness
It is important to identify the characteristics that make a performance measure a good assessment
of goal equivalence. An effectiveness performance measurement system will align the goals of
management with the goals of the corporation, and both parties will benefit. A lack of goal
congruence in a performance measurement system can be detrimental to a business in many
ways. Without proper performance measures, goal congruence is almost impossible to achieve
and will likely lead to lost profits and dissatisfied employees,
An effectiveness performance measurement system should have the following
characteristics:
 It should be based on activities over which managers have control or influence.
 It should be measurable.
 It should be timely.
 It should be consistent in its application.
When appropriate, the actual results should be compared with the budgeted results, standards, or
past performance. The measurements must not favor the manager over the goals of the entire
organization. Often, managers have the ability to make decisions that favor their individual units
but that may be detrimental to the overall performance of the organization.
As you’ve learned, it is important that the activities on which managers are evaluated are within
that manager’s control. In addition, it is very important for the information that is used in the
performance measurement system be gathered, evaluated, and presented in a timely manner.
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Performance measurement systems provide an indication of how well the evaluated managers are
doing their jobs. Remember, the organization wants managers to make decisions that are in the
best interest of the organization as a whole, and hence the need for the performance management
system. If managers do not receive appropriate feedback in a timely manner, they will not know
which decisions they should continue to make in the same manner and which are less effective.
The same is true from the corporation’s perspective. Timely information allows the evaluation
team to determine the effects of individual management decisions on the corporation as a whole.
In addition to being timely, performance measures need to be applied or measured consistently.
The accounting variables or other measures that are used to evaluate a manager should be
measured the same way from period to period. For example, if a performance measure includes
some form of income, such as operating income, then that measure should be used each time and
not replaced with another income measure for the current measurement cycle (usually one year).
If, upon further analysis, it seems that net income is a better measure to use in the evaluation of a
manager, then the new measure can be implemented during the next measurement cycle. When
measures are changed, it is imperative that the manager being evaluated is aware of the
measurement change, as this may affect his or her decision-making. The idea is to keep the
targets stable for a period. Otherwise, the measurements might be inconsistent, and thus
misleading. A good performance measurement plan would include the manager’s input in the
design discussion. Not only does this help to ensure that the plan is clear to all parties involved in
the process, it also helps to motivate managers. Rather than being told what goals are to be met,
managers will be more motivated to achieve the goals if they have input into the process, the
goals to be reached, and the measurements or metrics being used.
Performance Measures at NASA1
National Aeronautics and Space Administration (NASA) along with five NASA contractors
undertook a project to derive performance measures. As a result, they developed a series of five
models for measures. These measures included effectiveness, quantity, quality, value, and
change, and are as follows:
Effectiveness was measured as projected/actual. An example was number of tests
completed/number of tests planned.
Quantity was measured as process or product unit/sources of cost. An example was total number
of wind tunnel tests run/facilities management cost.
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Quality was measured as indicators of error or loss/process or product unit. An example of

quality measures is mistakes in work packages issued/work packages issued in total.
Value was measured as desirability/source of cost. An example of value measures is savings
from suggestion program/man hours to review suggestions.
Change was measured as the information provided by the indexes that are developed by tracking
the same performance measures over time. An example would be the improvement measures,
like Reduction by X percent in downtime of facilities/tests accomplished or attempted or
Increase by X percent of documents prepared/procurement clerk
These measures have some distinct advantages but also may be met with some resistance from
employees and contractors. Advantages likely included a better understanding of their processes
as well as an understanding of the amount of time wasted and value emulating from these
processes. Development and implementation become an opportunity to discover what may be
wrong with processes, to start a dialogue concerning ongoing change and improvement, and to
communicate and brainstorm about organizational inefficiencies. Networking involved in
development of the performance measures can become an equalizer among processes that break
down silos and complexity.
8.4. Measuring procurement performance
Historically, cost savings was considered the only reliable measure of procurement performance.
But spend savings can only go so far — at some point, it’s simply not possible to reduce costs
further, so procurement professionals need to reaffirm their value to the organization in other
ways. Performance measurement indicates what a project is accomplishing and whether results
are being achieved. It helps contract administrators by providing them information on how
resources and efforts should be allocated to ensure effectiveness and programme partners
focused on the key goals of a programme. It supports development and justification of budget
proposals by indicating how taxpayers and others benefit.
Here we look at five proven ways to measure procurement performance, along with a few tips
for improving the metrics
Five ways to measure procurement performance
1. Procurement Cycle Time
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We define the procurement cycle time as the time elapsed from placing creating a requisition to
receiving the goods. Decreasing the cycle times associated with procuring materials and services
is an effective way to cut procurement costs.
 Automating the procurement process with suppliers can significantly reduce the time it
takes to receive the ordered product.
Some ways to reduce procurement cycle time include:
 Minimize the time it takes to produce and approve a requisition
 Get approved purchase orders (PO) into the hands of vendors more quickly
 Proactively monitor open orders
 Provide vendor self-service portals empower vendors to enter their own invoices
2. Vendor performance
Vendor performance management refers to the monitoring and analyzing of the reliability,
quality, and performance of your company’s vendors. Monitoring vendors can help your
company boost efficiency and profits, reduce stock levels and inventory costs, and improve (both
internal and external) customer satisfaction.
Some vendor performance metrics to monitor are:
 Delivery lead times  The frequency of price changes
 Communication time lags  Compliance with negotiated terms
 Quality of the products supplied  Substitutions made
 Pricing competitiveness  Number of back orders
3. Spend under management
Spend under management refers to the percentage of your organization’s total spend that the
procurement department manages. It is a common metric of performance and can easily and
uniformly be applied to organizations across all industries and sizes. For every dollar that placed
under management, the average enterprise sees a benefit of between 6% and 12%.
Targeting areas of unmanaged spending is a key way procurement professionals can deliver
value and maximize savings for their organizations. We highlighted five ways to reduce
unmanaged spend here.
4. Cost savings
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Cost savings remains a fundamental, pivotal metric to measure the success of the procurement
function. Cost savings sounds simple enough, but how are companies successfully reducing
costs? One direct way is to reduce the cost per purchase order, using techniques including:
 Investing in digital technology and process automation
 Incorporating vendor self-service
 Adding mobile requisition and approval capabilities
 Using guided buying catalogs and Punch Out tools
5. Percentage of POs those are catalog-based
This metric doesn’t make everyone’s list, but when used as a proxy to measure compliance with
negotiated contracts and pricing it provides valuable insight. When a majority of routine
purchases are made through approved vendors through which you have pricing agreements,
prices are typically lower, service is generally higher, and errors are less frequent. In addition, by
using guided buying catalogs or Punch-out catalogs, organizations decentralize the requisition
process, empowering individual users to initiate the process, freeing the procurement department
to negotiate even better deals.
It’s only when you begin to measure the performance of your procurement activities that you can
begin demonstrating the value the procurement department and its personnel bring to an
organization. An easy way to start is by using our Procure-To-Pay Calculator that will help you
determine what procurement is costing you currently, and how you begin to save.
8.6. Benchmarking in procurement and supply
Today’s complex, lengthy, and data-driven supply chains make effective data management
essential for procurement organizations who want to become world-class in performance,
profitability, and competitive strength. Procurement benchmarking—setting clear standards for
performance and compliance, and using metrics such as key performance indicators (KPIs) to
evaluate how well procurement strategies and processes meet those standards—is one of the
most important tools procurement teams can use to transform spend data into better decision
making and more effective sourcing strategies that support your business goals.
By developing and implementing effective procurement benchmarking processes, you can make
sure your organization is building value, meeting its goals, and securing an optimal return on
investment (ROI) for every dollar spent.
The Importance of Effective Procurement Benchmarking
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Measuring performance and making appropriate adjustments is an important part of business

process management in general, but it’s especially so for a business-critical function like
procurement. Through the use of procurement analytics and purchasing KPIs like cost avoidance,
purchase order cycle times, and supplier compliance rate, procurement teams can effectively
evaluate overall procurement performance and parse spend data to refine and streamline
workflows for greater efficiency and effectiveness.
This refinement is important to more than just procurement, of course. A company’s
procurement strategies and spend management approach both have significant impact on the
ability of each department and business unit to meet their goals and support organizational
growth while keeping costs low and value high. And the data they produce is a crucial source
of business intelligence.
As chief procurement officers (CPOs) and other procurement leaders at best-in-class
organizations continue to shift procurement’s role toward value creation in the modern digital
marketplace, they are also establishing procurement as a center for company-wide digital
transformation. They understand just how important digital tools and proper data management
are to the competitive strength, agility, and resilience of their businesses—particularly in a global
economy where crises like the coronavirus pandemic, natural disasters, and international
conflicts can disrupt supply chains and threaten to cripple operations at the drop of a hat.
Consequently, any organization looking to achieve world class procurement, optimize their
business intelligence capabilities, and compete effectively at the same time must also embrace
the value of the benchmarking process.
Benchmarking defined as the continuous measurement of the company‘s products,
services, processes and practices against the standards of best competitors and other
companies who are recognized as leaders. The measures that are chosen for the
comparison must directly or indirectly impact upon customers ‘evaluation of the
company‘s performance.
Benchmarking is also a critical aspect of performance measurement that makes
management aware of state-of-the-art business practice. Many firms have adopted
benchmarking as a tool to assess their operations in relation to those of leading firms,
both competitors and non-competitors, in related and nonrelated industries. While
benchmarking performance metrics has become a fairly standard practice, many firms do
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not benchmark processes.

A critical aspect of benchmarking is the choice of whom to benchmark. Many firms
compare performance of internal business units involved in similar operations or located
in different regions.
Internal benchmarking provides a way to share knowledge as well as improve
performance. Internal benchmarking, however, provides little information concerning
performance relative to competition. A firm may be lagging competition and not be
aware of it. Information about competitor performance can be used to identify where
improvement is most needed; however, it is extremely difficult to capture information
about competitors' operational processes.
Non restricted benchmarking involves efforts to compare both metrics and processes to
best practices, regardless of where the relevant practice is found. It does not restrict
sources of information to any particular company or industry. Non restricted
benchmarking is grounded in the philosophy that is possible to learn from organizations
in unrelated industries which have outstanding performance or use innovative
approaches. In a study of best-practice supply chain companies, it was found that those
firms which perform at high levels of supply chain capability are much more likely to be
involved in benchmarking activity than firms which demonstrate average supply chain
capability marking. It is clear that benchmarking is considered an essential aspect of
measurement by leading organizations.
8.5. Procurement as intelligence customer
Intelligent customer function or intelligent client (IC) is an in-house capability within a host
organization which has responsibility for the ownership, management and delivery of a defined
service or range of services on behalf of part or all of the organization, to that organization.
Examples of the IC service include, IT/IS services, property and facilities, project delivery,
human resources, marketing, and research & development. The services for which the IC has
responsibility can be delivered by resources employed by the host organization (members of
staff) or can be sourced from the market (an outsourced service). The IC is responsible for
engagement with the host organization to understand and capture the important aspects of the
organization’s core business and strategy which the defined managed service will need to deliver
benefits, and providing a representation of that service in language that is understood by the
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organization, and for which the organization accepts it will fund,[clarification needed] typically
a service level agreement.
Where the service is to be delivered in part or full by a third party this agreement will need to be
utilized in a specification or service requirement statement. This specification, as part of a tender
document, enables the procurement of outsourced services.
Organizations nowadays want to know more about their customers, they need to collect
the available data and be able to build a good relationship with the customer specifically
after understanding the huge influence of customers on organizational operations.
in order to succeed in the business world organizations have to "gain a comprehensive
understanding of customers and their behavior by means of intelligent tools, which enable a
more pointed customer contact and a higher degree of customer loyalty". This argument means
that there is a need to employ all the available tools and utilities in order to guarantee reaching
the best and most accurate information about customers regarding their desires, needs and
preferences.
Customer intelligence can be defined as “the process of collecting, analyzing and applying
quantitative and qualitative information about the customer and its environment, with relevance
to the company’s (desired) relationship with the customer. Effective Customer Intelligence
activities have a direct business impact, particularly on revenue growth and profitability". Many
scholars have seen that customer intelligence is a good approach to make a business value it
helps in magnifying the role of customers in increasing the benefits and income of organizations
through adding more value to the business based on increasing the efficiency of organizational
performance.
8.7. Administration instruction
Administration is basically concerned with the formulation of the objectives, plans and policies.
A good administration in place will ensure the success of an enterprise.
Administration means overall determination of policies, setting of major objectives, the
identification of general purposes, and laying down of broad programs and projects”.
Also administration means guidance, leadership & control of the efforts of the groups towards
some common goals.”
As the definition clearly indicates, administration instruction is mainly concerned with the means
that are necessary for the accomplishment of pre-determined goals. Here means is the way by
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which something is done or obtained. When groups of individuals are working for the
accomplishment of a common goal, a division of labor is necessary, so that each individual will
know what to do. Or there is the need for an authority structure to control and coordinate the
activities of the individuals involved. Thus dividing the work among the members, having a
proper role assigned to every member in the group, following the leaders instructions are nothing
but the means to achieve the goal. In this sense, administration is an activity mainly concerned
with the means which also requires cooperation as well.

For example, let us suppose our common goal is to educate a group of individuals in the field of
marketing for medicines. Keeping this goal in mind, experts in the field of marketing specifically
for medicine are brought together, who are oriented to the goals and objectives to be achieved
with the group. Suppose, if each expert acts in his/her way without consulting the others, there
will be chaos in the group.
This would lead to lot of confusion and chaos as each expert acts independently without
consulting or cooperating with the others, thus unable to achieve their common goal. On the
other hand, if they cooperate with each other and discuss how can they achieve the given
objective. May be the experts can work out a timetable in everybody’s favor which will finally
help them to achieve their common goal. Thus, the essence of administration is the utilization of
cooperative action for the accomplishment of common goals.