Cips L5M4 1.1

CIPS Level 5 Advanced Diploma in
Procurement and Supply

Module: Advanced Contract and Financial Management
[L5M4]
Leading global excellence in procurement and supply

Learning outcome 1: Understand and apply tools
and techniques that can be used to measure and
develop contract performance in procurement
and supply
1.1 Assess the use of key performance indicators (KPIs)
1.2 Evaluate methods of measuring and improving supply
chain performance
1.3 Examine approaches available for supplier
development
1.4.Assess innovative measures to improve the supply
chain
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Slide 1
1.1 Assess the use of key performance indicators (KPIs)
You will understand:
• Cost
• Quality
• Delivery
• Safety

The organisation & KPIs
• Organisations must to understand what their
customers or stakeholders need
• What they must do meet them
• Needs are translated into KPIs which organisations use
to measure their success
KPI – Definition
• Financial and Non-Financial metrics used to reflect
critical success factors (CSFs) of an organisation.
• Assess the present state of a business or a contract and
prescribe the next course

KPI definition cont`d
• A Key Performance Indicator (KPI) is a measurable value
that demonstrates how effectively a company is achieving
key business objectives.
• Organizations use KPIs to evaluate their success at reaching
targets.
Example:- Owner of a local pub.
• Established average pints per patron per visit (ppv) as a
KPI. In the last month he averaged 1.1ppv
• (compared to the local pub average of 1.4ppv and the
previous month's average of 1.3ppv).
• In this sense, establishing a KPI can help open the door to
questions about his business performance.

How to set KPIs
• Organisation has to determine what is essential to
different groups of stakeholders and customers before
setting KPIs
• To understand the areas in which to excel in order to
become competitive
• CSFs are those areas that are essential for a contract to
be successful
• Quantifiable KPIs are indicators of how well the CSFs
are being achieved.

KPI development
• KPIs need to be developed from CSFs
• No set number of KPIs but generally between six and

eight at most
• Fig 1.1 The relationship between strategy, CSFs and

KPIs (below)

1.1 Developing key performance indicators
(KPIs)
Figure 1.1 The relationship between strategy, CSFs and KPIs
Slide 2
1.1 Examples of KPIs
• Price measures
• Product quality
• Service quality
• Delivery
• Safety
Slide 3
KPIs must be SMART
• Specific – clear and concise statement of what is
required
• Measurable – quantified to gauge achievement
• Achievable – realistic given available resources and
context
• Relevant – provide useful data to gauge critical areas
of performance
• Time bound – set with a specific time frame for
achievement and measurement

Characteristics of KPIs – BIFM,2014
Should achieve the following:-
• Be aligned to service delivery goals
• Provide context
• Create meaning at all organisational levels
• Be based on clear measurable data
• Be easy to understand
• Lead to action

Characteristics of effective KPIs - Eckerson
• Sparse – the fewer the KPIs , the better
• Drillable – users can drill into detail
• Simple – users understand the KPIs
• Actionable – users know how to affect outcomes
• Owned – KPIs have an owner
• Referenced – users can view origins and context
• Correlated – KPIs drive desired outcomes
• Balanced – KPIs do not undermine each other
• Aligned – KPIs consist of both financial and non
financial metrics
• Validated – employees cannot circumvent KPIs
•
Many types of KPIs
• Financial - Actual expenses.
• Non-Financial - Customer experience.
• Leading (predictive) - % Growth in New Markets
• Lagging (results-based) - labor cost per unit of output
• Qualitative - employee satisfaction survey
• Quantitative – units per man hours
• Hard
• Soft
• Operational (short term)
• Strategic (long term)

Purpose – contract management
• Measure improvement and performance
• Reward performance
• Develop suppliers
• Manage supplier improvement to ensure expectations and
requirements are met
• Improve and strengthen relations with suppliers
• Justify inclusion of each supplier in the supply base
• Identify suppliers who can no longer meet requirements
and who need to be replaced
 KPIs are seen as drivers of continuous improvement in
supplier performance management

Neely`s Four CPs – Summary purpose of KPIs
1. Check the position
• Managers see where an organisation is in relation to its
plans and to its competitors
2. Communicate Position
• Used to report on performance to internal and external
stakeholders
3. Confirm Priorities
• The crucial factors on which management must focus
4. Compel progress
• Can be used to evaluate managers and staff and ensures
every employee is committed to achieve them.

(Fig 1.3 Advantages and limitations of KPIs for supplier performance
• Advantages for supplier • Limitations for understanding
performance supplier performance
• Motivate compliance and • Focus the measured area and not

improvement the whole performance
• Manage supply risk • Leads to cutting corners on
quality or service to achieve
targets
• Support contract • Can be misaligned with corporate

management objectives
• Identify high performing • Time consuming to create,
suppliers monitor and manage
• Identify closer partnership • Risk that the wrong metrics can
suppliers be selected
• Give feedback for learning • Can become out of date
and continuous improvement


Four Notable KPIs- Cost, Delivery, Quality, Safety
• The Supply Chain Council developed the Supply Chain
Operations Reference Model (SCOR) as a set of metrics
for measuring business performance in five key process
areas:-
• Plan, Source, Make, Deliver and Return

Supply Chain Metrics – three crucial components
a. Translate financial objectives and targets into measures of
operational performance
b. Translate operational performance into accurate
predictions of future earnings or sales
c. Engineer behaviour across the supply chain supporting
the organisation`s overall business strategy
• KPIs enable supplier performance to be measured and
subsequently managed.
• Contract manager to provide regular feedback to the
supplier on their performance against the agreed KPIs.
• Four Notable KPIs – Cost , Quality, Delivery and Safety

1. Cost
• KPIs can relate to purchase price/or cost
A. Price measures include:-

a. Marketplace competitiveness
b. Discounts and payment terms offered
c. Flexibility
d. Estimated timeliness
e. Accuracy

i. Cost Reduction Target
• Historical cost baseline for a specific good or service
and compares it with the current cost impact
• E.g. If the baseline is $100 and the new amount is $95,
the resultant difference of $5 saving represents 5%.
ii. The total cost of ownership TCO
• The cost sustained from the point of delivery of raw
materials to the products' final conversion into a
saleable good.

Table 1.1 Cost Measures
Key Key Measurement Performance Trend

performance performance target (red/amb
area indicator er/green)
Cost/price To contract Amount of All
rejected goods/services
invoices due to Are invoiced at
incorrect contracted rate
pricing or less
To industry Periodic Price paid is at

benchmark industry industry/mark
benchmark of et
all unit pricing benchmark+/-
2%

Table 1.2 CSF and KPI for service contract
Critical Success Key Performance Performance
Factors Indicator Measures
The cost of service The contractor is Cost v. budget
delivery must working effectively reports
remain within with the employer Cost variations
budget to maintain costs at Measurement of
an acceptable level innovation and
continuous
improvement
proposals

Dolan (2004) – Supplier rating on costs related to
continuous improvement
• Supplier partnership initiatives
• Performance against cost reduction targets
• Cost reduction recommendations submitted by the
supplier.
• Measured by the type and number of suggestions
received, ideas implemented and the cost savings
produced.

KPIs for Supplier Price/Cost Performance
• Basic purchase price or price range
• Price or whole life costs compared with other suppliers or
benchmark
• Percentage range of acceptable price/cost variance
compared with other suppliers or benchmark
• Target value or percentage cost savings during the period
• Number of cost-saving initiatives proposed or implemented
during the period
• Percentage range of acceptable cost variance from
estimated or budgeted costs (as a measure of effective cost
management)

Total Cost Performance Score
• The total score of all cost related factors on the scorecard
• Reflects the cost of doing business with the supplier and
the contribution that the supplier makes in relation to the
market average
• Refer to Table 1.3 Total Price Performance (Gasumie 2012)
Points Description
0 Price-quality ratio is beneath the market
average and unacceptably low
2 Price- quality ratio is below market average

Table 1.3 Total Price Performance (Gasumie 2012)
Points Description
6 Price-quality ratio reflects market average
8 Price – market ratio exceeds market average
10 Price- quality ratio markedly exceeds market
average and is outstanding

Quality
Garvin 1984 - Five Major Approaches to defining Quality
1. The Transcendent Approach
• Equates quality with excellence
2. The User-based Approach
• Concerns the making of a product that is fit for
purpose and use (Juran 2010)
3. The Product-based Approach
• Sees quality as precise and measurable

Quality cont`d
4. The Manufacturing-based Approach
• Regards quality as the manufacture of a product that
precisely meets the specifications
5. The Value-based Approach
• Develops the manufacturing-based approach by
further incorporating cost and price

Service Quality and Servqual
• Service quality difficult to assess due to unique nature
of services
• The Servqual model developed to overcome problems
of assessing service quality
• Measures the difference between what customers
expected a service to be and how they perceived it.
• Establishes the gap between the expected service and
the actual service
RATER Framework
• Framework around which the ServiQual measures are
based.

Table 1.4 Five Rater Dimensions
Reliability Service provider ability to perform the service
dependably and accurately
Assurance The knowledge and courtesy of employees and
their ability to inspire trust and confidence
Tangibles Appearance of physical aspects, such as
equipment or facilities used. E.g. for cleaning,
vacuum cleaners, detergents, staff uniforms,
personnel and communications equipment
Empathy Identification of the customer`s needs and

expectations and the level of individualized
attention to a customer
Responsiveness Ability and willingness to help customers and
provide prompt and appropriate service

The Servqual model
• The Servqual model was developed with 22 questions
under the Five Rater dimensions
• Questions are related to the service that is being assessed.
• Quality Basic KPIs – measuring quality performance
Key measurement Performance Data source Calculation
performance target method
area
Reliability Products 95% Number of Number of
supplied, in unacceptable products
the period, to items ordered –
meet agreed delivered number of
standards unacceptable/
total number
of products
ordered x 100

Delivery
• Service delivery, product delivery or on-time logistics
• Right products/services at the right cost, quality, deliver at
the right time, in the right quantity and at the right place.
• Delivery measures can include:-
– %age on time deliveries in full
– %age of early deliveries
– %age of late deliveries
– %age of deliveries over order quantity
– %age of deliveries under order quantity
– %age of deliveries with the correct paperwork

• Table 1.7 Examples - Delivery KPIs
Key KPI measurement Performance target Trend
performance (red/amber/
area green)
Delivery In full Number of orders X% of goods or Improved %
received services are (green)
incomplete provided in correct
volume/quantity
On time Number of orders X% of goods or

received later than services are
expected or later provided on
than required date/time required
delivery time
Secure/ Number of orders Less than X% of

no received defective goods/services are
damage and not usable defective on receipt

SLAs and KPIs
• SLA defines measurement of the service delivery using
KPIs as measurements of the service performance
• SLA is a contractual document - expected service level
and service credit regime
• A schedule to the main terms or a stand alone
agreement
• Hiles 1993 – “ An agreement between the provider of a
service and its users, which quantifies the minimum
quality of service which meets business needs”

Service Credits
• Compensation given by a supplier to a buyer when
service falls below the required level
• Financial recompensate or a credit offset against future
payments due to a supplier
• Service levels and service credits should be set at
realistically achievable levels.

Project Success Factors
• Time performance
• Cost performance
• Quality performance
• Health and safety performance
• Client satisfaction

Safety – a top priority of any organisation
• Measurement can be broken down into different areas
such as :-
• Workplace accident rates
• Staff safety training
• Availability of resources
• Existing safety measures
• Safety signs and precautions

Project KPIs for H&S
• Accidents reported
• Lost time as a result of accidents
• Industrial accident rates ( covering lost time, external
medical treatment, basic first aid treatment, etc)
• Accidents avoided
• A Safety Performance Index (SPi) can be calculated based
on time lost and total man hours worked
SPi = (LTI x C) / m
where LTI = lost time incidents to date
m = the total manhours expended to date
c =constant (200 000) which represents 100 employees working a full year
(100 x 2000)

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CIPS Level 5 Advanced Diploma in

Procurement and Supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

• No set number of KPIs but generally between six and

• Fig 1.1 The relationship between strategy, CSFs and

Leading global excellence in procurement and supply

Figure 1.1 The relationship between strategy, CSFs and KPIs

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

• Motivate compliance and • Focus the measured area and not

• Support contract • Can be misaligned with corporate

and continuous improvement

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

A. Price measures include:-

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Key Key Measurement Performance Trend

To industry Periodic Price paid is at

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Empathy Identification of the customer`s needs and

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

On time Number of orders X% of goods or

Secure/ Number of orders Less than X% of

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

• Health and safety performance

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

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