Performance Measurement and Evaluation: South-Western Cengage Learning

PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e
Performance
Measurement and
Evaluation
Chapter 19
© 2012 Cengage Learning. All rights reserved. May

not be scanned, copied or duplicated, or posted to
a publically accessible website, in whole or in part. SOUTH-WESTERN CENGAGE LEARNING
Performance Measurement
 Effectiveness
 Extent to which, by choosing a certain
course of action, management can meet a
previously established goal or standard
 Efficiency
 Relationship between planned and actual
sacrifices made to realize a previously
agreed-upon goal

2
a publically accessible website, in whole or in part. Purchasing & Supply Chain Management, 5e
Why Measure Performance?
 Support better decision making

 Support better communication
 Provide performance feedback
 Motivate and direct behavior

3
Problems with Purchasing and Supply
Chain Measurement and Evaluation
 Too much data
 Wrong data
 Measures that are short-term focused
 Lack of detail
 Drive the wrong performance
 Measures of behavior vs.
accomplishments

4
Integrated Company/Purchasing
Measurement Process

5
Price Performance Measures
 Evaluates how effectively purchasing

dollars are spent
 Measures
 Actual price compared to plan
 Actual price vs. market index
 Price comparisons among operations
 Target prices achieved

6
Purchase Price Variance from Plan
Purchase price variance = Actual price – Planned price
Purchase price variance % = Actual price / Planned price
Total purchase price variance =

(Actual price – Planned price) x Purchase quantity (or est. volume)
Current year $ impact of purchase price variance =

(Actual price – Planned price) x (est. volume x % of requirements left)
Unit of measure can be either $ or %

7
Performance Reported by …
 Purchase item
 Commodity or family group
 End product
 Project
 Buying location or department
 Buyer
 Management group
 Supplier
8
Actual Prices vs. Market Index
1a Market-based index for Item X March 31, 2011 = 125
1b Market-based index for Item X June 30, 2011 = 128
2.4%
1c Market index change = (128 - 125) / 125 =
increase
2a Actual price paid for Item X March 31, 2011 = $150.00
2b Actual price paid for Item X June 30, 2011 = $152.00
1.3%
2c Price paid change rate = ($152 - $150) / $150 =
increase
Better by
3 Comparison to market 2.4% - 1.3% =
1.1%

9
Price Comparisons among Operations
 Actual prices for similar items

 Plants
 Divisions
 Business units
 Helps identify commonly purchased
items between operating units for
volume leverage

10
Target Prices Achieved
 Target pricing
 Process of determining what external
customer is willing to pay for product or
service and then assigning specific cost
targets to components, assemblies, and
systems that make up product or service
Target price – Profit target = Allowable cost

11
Cost-Effectiveness Measures
 Cost changes
 Increase or decrease in cost resulting from
change in strategy or practice.
 (New price – prior price) x estimated volume
 Cost avoidance
 Price increase that would have occurred
without specific purchasing effort or action
 Requires manual calculation
 Can be subject to interpretation

12
Revenue Measures
 Royalties generated from supplier- or

buyer-developed technology and
patents driven by supply management
 Supplier contribution as reason for new
business
 Return on licensing technology driven
by supply management

13
Revenue Measures
 Number of patents that have led to

royalties
 Number of invention disclosure forms
filed
 Number of patents granted
 Value of free samples from suppliers

14
Quality Measures
 Defects in parts per million (ppm)

 Customer defects per supplier
 Field failure rates by …
 Purchase item
 Supplier

15
Time/Delivery/Responsiveness
Measures
 Time-to-market targets
 New product and services
 On time delivery/responsiveness
 Due dates, scheduled or promised
 Delivery windows
 Acceptable early or late deliveries
 Achieving new product introduction
ramp up schedules and intro dates
16
Time/Delivery/Responsiveness
Measures
 Cycle time reductions
 Order entry
 Manufacturing/operations
 Distribution and logistics
 Responsiveness to …
 Schedule changes
 Mix changes
 Design or service changes

17
Technology/Innovation Measures
 First insight/production outputs of new

supplier technology
 Standardization
 Use of industry standards to reduce
complexity

18
Physical Environment and
Safety Measures
 Use of sustainability criteria in
procurement decisions
 Processes in place to embed
sustainability and social responsibility
into …
 Supplier evaluation and qualification
decisions
 Product design, redesign, and statements
of work
19
Safety Measures
 Developing processes/knowledge to
ensure understanding of sourcing,
recycling, etc.
 Development of relationships with key
suppliers to gain access to protected
information on chemical makeup of
sourced products

20
Safety Measures
 Working with risk management to
develop, quantify, and base decisions
on risks related to nonconformance
with sustainability and social
responsibility initiatives
 Maintaining appropriate records to feed
into corporate sustainability and social
responsibility reporting

21
Asset and Integrated SCM Measures
 Inventory
 Dollar value of inventory
 Inventory turnover
 Days/weeks/months of supply
 Transportation cost reduction
 Demurrage and detention
 Use of premium transportation
 Customer orders
22
 E-transactions
 Absolute number of suppliers
 Percentage of suppliers
 Dollar value of orders
 Percentage of orders
 Percentage of ASNs
 EFT
 Meeting customer requirements

23
 E-transactions (cont.)
 Inventory throughout the supply chain
 Number of dollars of e-reverse auctions
 Number of dollars of e-quote packages
 Pull systems/shared schedules/
supplier-managed inventory (SMI)

24
Administration and Efficiency
Measures
 Current budget plus adjustment
 Based on expected business conditions
 Control ratios
Purchasing budget = Est. expenditures
for direct materials X Control ratio
 Other approaches

25
Other Approaches
 Supply management workload

 P.O.s processed
 Line items processed
 Headcount
 Be careful of focusing too heavily on
purchasing “efficiency” measures
instead of purchasing “effectiveness”
measures

26
Governmental and Social Measures
 Minority, women, and small business

enterprise (MWBE) objectives
 Percentage of spend to total spend
 Number of suppliers in each MWBE
category
 Growth of MWBE spend
Annual MWBE $ / Total purchase $ = %

27
Other Categories of Measures
 Internal customer satisfaction

measures
 Supplier performance measures
 Supplier scorecards
 Cost of nonperformance
 Strategic performance measures

28
Sampling of Strategic
Purchasing Measurement Indicators
 Proportion of quality-certified suppliers
to total suppliers
 Total number of suppliers
 Supplier lead times indicators
 Percentage of purchase dollars
committed to long-term contracts
 Supplier development costs and
benefits
29
Developing a Performance
Measurement and Evaluation System
Determine
categories to
measure
Implement and
review system Develop specific
performance and measures
measures
Finalize system Establish

details objectives for each
measure

30
Determine Categories to Measure
 Price effectiveness  Efficiency

 Cost effectiveness  Government/social
 Quality  Supplier
 Time performance
 Technology  Strategic
 Assets performance
 Other

31
Develop Specific Measures
 Objectivity  Directly related to

 Clarity organizational
 Use of accurate and objectives
available data  Joint participation
 Creativity  Dynamic over time
 Non-manipulable

32
Establish Objectives
for Each Measure
 Historical data
 Often modified with performance
improvement factor  current objective
 Internally derived comparison
 May lose sight of competitors
 Unhealthy rivalry
 Competitive external analysis
 Against best-in-class organizations

33
Finalize System Details
 Reporting frequency
 Will differ between measures
 Education and training
 Understand accountability and
responsibility
 How to use system output
 Individual and department evaluations

34
Implement and Review System
Performance and Measures
 Pilot test or trial runs
 Update over time
 Eliminate obsolete or inappropriate
measures

35
Benchmarking Defined
 Continuous measuring of products,

services, processes, activities, and
practices against …
 Firm’s best competitors
 Those companies recognized as industry
or functional leaders

36
Types of Benchmarking
 Strategic benchmarking
 Comparison of strategies
 Operational benchmarking
 Comparison of functional activities
 Support activity benchmarking
 Controlling internal overhead and rising
costs

37
Benchmarking Benefits
 Helps identify best business or

functional practices
 Breaks down reluctance to change
 Serves as source of market intelligence
 Creates valuable professional contacts
between firms

38
Benchmarking
Critical Success Factors
 Must become accepted process
 Must be permanent part of system that
establishes goals, objectives, and
competitive strategies
 Must be willing to commit necessary
legwork to data gathering
 Detailed and accurate benchmarking
data and information
39
Benchmarking
Critical Success Factors
 Must view benchmarking as way to
learn from outside companies
 Must improve internal operations on
continuous basis
 Need to avoid “not invented here”
syndrome

40
Information and Data Sources
Trade Library
Internet
journals resources
Conferences
Benchmark
and Suppliers
target(s)
seminars
Consultants
Trade
and industry
groups
experts

41
The Benchmarking Process
Planning Phase
Analysis Phase
Integration Phase
Action Phase
Maturity Phase
42
Planning Phase
 Determine which products, processes,

or functions to benchmark
 Identify benchmark target
 Determine data and information
requirements

43
Analysis Phase
 Determine how and why benchmark

target is better
 Determine how to include benchmark
company’s best practices
 Identify future trends and performance
levels

44
Integration Phase
 Communicate benchmark findings to

key personnel
 Establish operational targets and
functional goals based on
benchmarking findings

45
Action Phase
 Include personnel responsible for

carrying out plans during formulation
of action plans
 Develop a schedule for review and
updating of goals and plans
 Develop system to communicate
benchmarking progress

46
Maturity Phase
 Continuous use of benchmarking at all

organizational levels
 Continuous performance improvement
resulting from the benchmarking
process

47
Balanced Scorecard
 How do customers see us?
 Customer satisfaction perspective
 At what must we excel?
 Operational excellence perspective
 Can we continue to improve and create
value?
 Innovation perspective
 How do we look to shareholders?
 Financial perspective
48
Measurement System Characteristics
 Measurement is not free

 Not all aspects of performance lend
themselves to quantitative
measurement
 Purchasing and supply management is
better served by a few precisely defined
and thoroughly understood measures

49
 Effective measurement requires

consistent and reliable database
 Periodic review of measurement
system to …
 Eliminate unimportant or unnecessary
measures
 Add new measures as required
 Reevaluate objectives or targets

50
 There is no one best way to measure

performance
 Measurement reporting requirements
and content vary by position and level
within organization
 Single, overall productivity measure is
not feasible

51
 Many industries need to shift from

operational measures to strategic
measures
 Strategies and plans used to produce
measure’s results are probably more
important than end result itself
 Balanced scorecard approach is highly
effective
52
Human Resource Characteristics
 Measurement and evaluation system
does not substitute for effective
management
 Effective system requires
communication
 Measures must …
 Reinforce positive behavior
 Be positively linked to the reward system
 Not be used punitively
53

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PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Support better decision making

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Evaluates how effectively purchasing

© 2012 Cengage Learning. All rights reserved. May

Purchase price variance % = Actual price / Planned price

Total purchase price variance =

Current year $ impact of purchase price variance =

Unit of measure can be either $ or %

© 2012 Cengage Learning. All rights reserved. May

1b Market-based index for Item X June 30, 2011 = 128

2a Actual price paid for Item X March 31, 2011 = $150.00

2b Actual price paid for Item X June 30, 2011 = $152.00

© 2012 Cengage Learning. All rights reserved. May

 Actual prices for similar items

© 2012 Cengage Learning. All rights reserved. May

Target price – Profit target = Allowable cost

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Royalties generated from supplier- or

© 2012 Cengage Learning. All rights reserved. May

 Number of patents that have led to

© 2012 Cengage Learning. All rights reserved. May

 Defects in parts per million (ppm)

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 First insight/production outputs of new

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Supply management workload

© 2012 Cengage Learning. All rights reserved. May

 Minority, women, and small business

Annual MWBE $ / Total purchase $ = %

© 2012 Cengage Learning. All rights reserved. May

 Internal customer satisfaction

© 2012 Cengage Learning. All rights reserved. May

Finalize system Establish

© 2012 Cengage Learning. All rights reserved. May

 Price effectiveness  Efficiency

© 2012 Cengage Learning. All rights reserved. May

 Objectivity  Directly related to

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Continuous measuring of products,

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Helps identify best business or

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Determine which products, processes,

© 2012 Cengage Learning. All rights reserved. May

 Determine how and why benchmark