Purchasing &

Supply Chain
Management
7th edition

Chapter 19
Performance Measurement and
Evaluation

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 Learning Objectives
By the end of this chapter, you should be able to:
• Create a purchasing and supply chain measurement framework
• Review and provide insight into key purchasing and supply chain
measures
• Review benchmarking and its importance
• Identify key characteristics of effective measurement systems

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 Chapter Overview
• Purchasing and supply chain performance measurement and evaluation
• Purchasing and supply chain performance measurement categories
• Developing a performance measurement and evaluation system
• Performance benchmarking: comparing against the best
• Summary of purchasing measurement and evaluation characteristics

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 Performance Measurement
• Effectiveness
− The extent to which, by choosing a certain course of action,
management can meet a previously established goal or standard
• Efficiency
− The relationship between planned and actual resources applied to
achieve a previously agreed-upon goal
− Usually relates to some input to a performance output

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 Why Measure Performance?
• Measure contributions to company competitive performance
• Support better decision making
• Support better communication
• Provide performance feedback
• Motivate and direct behavior

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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

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 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 %

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 Performance Reported by …
• Purchase item
• Commodity or family group
• End product
• Project
• Buying location or department
• Buyer
• Management group
• Supplier

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 Price Comparisons among Operations
• Actual prices for similar items
− Plants
− Divisions
− Business units
• Helps identify commonly purchased items within the firm for volume
leverage

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 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

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 Cost-Effectiveness Measures
• Cost changes
− Increase or decrease in cost resulting from change in purchasing
strategy or practice
• Cost avoidance
− Difference between price paid and a potentially higher price which
might have occurred without specific effort or action
− Requires manual calculation
− Can be subject to exaggeration

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 Revenue Measures
• Demonstrate impact of strategies on firm’s revenues
− 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
− Number of patents that have led to royalties
− Number of invention disclosure forms filed
− Number of patents granted
− Value of free samples from suppliers

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 Economic Value-Added Measures
• Measure of a company’s financial performance based on the residual
wealth
− Calculated as:
Net operating profit after taxes – (Total assets – Current
liabilities) x Weighted average rate of return
• Goal is to develop greater returns than minimum expected return
− Increased product offerings
− Improved productivity
− Greater innovation

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 Quality Measures
• Defects in parts per million (ppm)
• Customer defects per supplier
• Field failure rates by …
− Purchase item
− Supplier

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 Technology/Innovation Measures
• First insight/production outputs of supplier technology
• New innovations incorporated into products or services
• Standardization and use of industry standards to reduce complexity

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 Environmental Sustainability Measures (1 of 2)
• Use of sustainability criteria in procurement decisions
• Processes in place to embed sustainability and social responsibility into:
− Supplier qualification and certification decisions
− Product design, redesign, and statements of work
• Developing processes/knowledge to ensure understanding of sourcing,
recycling, etc.
• Developing relationships with key suppliers to gain access to protected
information on chemical makeup of purchased products

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 Environmental Sustainability Measures (2 of 2)
• Working with risk management
− 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

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 Asset and Integrated SCM Measures (2 of 3)
• E-transactions
− Absolute number of suppliers
− Percentage of suppliers
− Dollar value and percentage of orders
− Percentage of advanced shipping notices
− Electronic funds transfers
− Meeting customer requirements

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 Asset and Integrated SCM Measures (3 of 3)
• E-transactions
− 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)

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 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

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 Other Approaches
• Purchasing workload
− P.O.s processed
− Line items processed
− Headcount
• Be careful of focusing too heavily on purchasing “efficiency” measures
instead of purchasing “effectiveness” measures

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 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 $ = %

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 Safety Measures
• Safety of supplier employees
− Look at number of incidents
− History of poor and unsafe working conditions in emerging countries
• Affects awards of new business

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 Other Categories of Measures
• Internal customer satisfaction measures
• Supplier risk and performance measures
− Supplier performance
 Quality
 Cost
 Delivery
− Risk measures
• Strategic performance measures

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Determine Which Categories to Measure

• Price effectiveness • Government/social

• Cost effectiveness • Supplier performance
• Quality • Risk
• Time • Strategic performance
• Technology • Other
• Assets
• Efficiency

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 Develop Specific Measures

• Objective • Promotes creativity

• Clear • Uses available data

• Nonmanipulable • Relates to purchasing

objectives
• Dynamic

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 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 analysis
− Benchmarking against best-in-class organizations

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

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 Benchmarking Defined
• Continuous measuring of products, services, processes, activities, and
practices against …
− A firm’s best competitors
− Those companies recognized as industry or functional leaders

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

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 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

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 Information and Data Sources

Library Conferences
Trade journals Internet
resources and seminars

Consultants
Benchmark
Suppliers and industry Trade groups
target(s)
experts

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 The Benchmarking Process

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 Planning Phase
• Determine which products, processes, or functions to benchmark
• Identify benchmark target(s)
− Competitors
− Noncompetitors
• identify data and information sources and requirements

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 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

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 Integration Phase
• Communicate benchmark findings to key personnel
• Establish operational targets and functional goals based on benchmarking
findings

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 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

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 Maturity Phase
• Continuous use of benchmarking at all organizational levels
• Continuous performance improvement resulting from the benchmarking
process

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 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

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