Improving Procurement Performance

8/3/2019 Improving Procurement Performance

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21. BRIDGING THE PROCUREMENT-PERFORMANCE GAP

Improving the Bottom Line

Manufacturing companies spend, on an average, 60 percent of total sales income on

procurement of materials, supplies of components, and outside services. Savings made in

procurement expenditure flow directly to profit. Profits are the lifeblood of the business

operations and necessary for survival. Thus there is a need for appraisal of procurement

performance with the purpose of improving the efficiency, effectiveness and profitability of the

company.

A large number of buyers, spending the whole day in solving yesterday's or today's problems,

do not find time to understand and take proactive actions to solve future problems which are

equally important for the survival of their company. Success in business today is based on the

assumption that no matter how we are today, we can and must be better tomorrow. That is

because the competition is constantly expecting more and more. We must forget our glorious

past and should address the future.

Many procurement strategies have often been criticized as short- sighted and focused on the

near term. One manifestation of this syndrome is the excessive attention to 'fire-fighting'.

Planning for performance improvement in procurement function, regardless of complexity or

size of the company is a courageous step which sometimes involves not only a major attitude

change but also active participatory involvement of the top management and commitment

procurement and cross-functional staff.

'To be a world-class manufacturer, a company needs to challenge everything it has done in the

past. It has to change dramatically from the way it selects and develops suppliers to the way it

meets the next customer requirements and manages supply chains. This demands a change in

mind-set, which searches for opportunities defining what a procurement function can contribute

to the company's competitive advantage, survival, and growth. It needs actions to improve

performance focused on the vision of the company and everyone in the procurement department



working on a clear, complete, and measurable set of goals. Unfocused activities may not result

in positive performance.

The traditional drive on the single-point formula of cost reduction through supplier pricereduction alone can make companies vulnerable when they fail to add value to the supply chain.

Cost reduction and simultaneous value addition is the route to competitive advantage.

The efficiency of the procurement function at procuring products and services may include

elements such as:

• Speed of working.

• Efficiency of the work flow.

• Management of procurement administration.

• Ability to use procurement resources efficiently.

• Use of information technology to improve efficiency.

• In-bound supply chain.

• Continuous improvement of processes.

• Adaptability to respond to changing requirements.

It is generally accepted that companies exist to create added value for customers by

transforming inputs through a number of activities to produce outputs. The transformation

process costs money and other resources. It is important for the procurement manager to ensure

that the procurement activities for which he is responsible are:

1. Effective: Meeting next customer needs, on time, every time.

2. Efficient: Keeping costs and inputs to minimum, efficient in using the suppliers

and company's resources.

3. Responsive: Adapting to changes in supply market and internal customer

requirements.

4. Elimination: Eliminating non-value-adding activities.

5. Focused on suppliers' competence and releasing their potential.



Chart 1 :Some Examples of Procurement Weakness

1. Inclination not to see end-to-end process.

2. Inclination to complacency.

3. Inclination to think only of procurement function while acting.

4. Inclination not to use data, information, and facts.

5. Inclination not to foster supplier abilities or potential.

6. Inclination not to do root cause analysis

7. Inclination to neglect quality.

8. Inclination to solve problems with fire-fighting approach and end with

patch-up solutions.

9. Inclination to playing a safe game, not to take challenges

10. Inclination to work on short-term problems.

Features of Purchasing Performance

Procurement performance improvement has to be targeted at meeting customer requirements by

doing the right things right the first time. It begins with strategic procurement decisions that

must be made and fully supported by the top management. It is a top- down affair and it needsto encourage a balanced approach based on the following features.

1. Focus on retrospective performance assessment and concentration on future

performance planning and improvement.

2. Identification and recognition of skills and competences associated with higher level

of performance.

3. Identification and recognition of outputs, which are defined in qualitative terms and

not just quantitative ones.4. Recognition of the need to get thoroughly trained in the skills required for

agreeing on goals and objectives of the procurement function and providing

feedback on them to review performance.

5. Obtaining better results from building cross-functional teams internally and teaming

up with suppliers for understanding and managing joint performance within an agreed

framework of planned goals, standards, and attitude and competence requirements.



6. Establishing a culture in which both buyer and supplier take responsibility for

improvement in their processes and contribute to shared vision and each other's

growth.

7. Listening to suppliers' suggestions very closely and evaluating them carefully, in

whatever way they can contribute towards performance improvement.

8. Linked to corporate strategy.

9. Providing methods to measure and report on performance.

10. Providing feedback and allowing corrective action to meet goals.

11. Linking rewards to results.

Chart 2. Ten Tendencies which Make for Poor Procurement

performance

1. Tendency to depend only on buyer's own judgement.

2. Tendency to think of only procurement department.

3. Tendency not to utilize data and information.

4. Tendency not to accept and use suggestion from others.

5. Tendency not to look out of box.

6. Tendency not to take difficult challenge.

7. Tendency to neglect quality.

8. Tendency to evaluate bids on price.

9. Tendency to sweep problems under the rug.

10. Tendency to act without a strategy.

Elements of Procurement Performance Improvement

Today processes outlive products. In many industries the life cycle of a product may be

measured in months, while business processes for design, production, sales, and service

functions will exist as long as the company continues in operation. This underlines the



significance of process thinking and process optimization. A company may mess up a product or

two, but if it messes up a process for too long it may not stay in business (Watson 1994).

For performance improvement through process thinking, a buyer must understand a group of

either related or unrelated activities that together create value for an internal customer. For

example, fulfilment of release of procurement purchase order and the receipt of goods is a

process. It involves not only the requistioner but also various levels of approvals and routing,

depending on the product requirement and value involved. Unless the work flow is understood

and the need for each activity is questioned it cannot be ideally improved. .

Chart 10.3. Reasons for Poor Procurement Performance

1. Misplaced priorities.

2. A lack of focus.

3. Top management not taking interest in improvement activities.

4. Lack of resources to perform job.

5. Underestimating external pressures like opportunities, and threats in the supply

environment.

6. Internal weaknesses such as unskilled people, inefficient bureaucratic processes,

outdated technologies, culture or management style of the company.

7. Lack of awareness of what is happening outside and inside the industry.

8. Preoccupation with day-to-day problems.

9. Improper leadership and communication.

10. Arm's-length relations between procurement staff and next customer.

For example, releasing a purchase order comprises the following series of tasks: sending an

enquiry, receiving a reply, selection of suppliers, comparing of quotations, negotiation with

suppliers, placing an order, booking materials with carriers, receiving, etc. None of these

activities is of the slightest interest or value to the requisition raiser. He is not interested how

many suppliers the buyer has, how he selects them, how he awards or deletes them from the



approved list. He is just interested in how material procured meets his specified needs on time at

the right location.

Whether it is a production or procurement process, improvement would be easy if the buyer

continuously improves every activity, every task and sub-task which affects the vision. For this,

he must get his procurement system under control, and work to eliminate wasteful activities.

The basic elements of procurement improvement process fall into eight areas of activity

described below. These can be used as the foundation stone for building performance

improvement activity.

CUSTOMER-CENTRED APPROACH

The vital area in performance improvement is creating a passion for customer-centred

approach. Without this, little else matters. The customer is where it all starts. The focus

should be on value. That means knowing what the next customer needs and wants,

and successfully translating that knowledge into the operating requirements of day to-

day actions.

Chart 10.4. Possible Reasons for Need to Improve Procurement Performance

1. Disastrous existing performance.

2. Signals of impending decrease in productivity, efficiency, and effectiveness.

3. A desire to leap further ahead of competitor to become world class and set an example.

.

Centre means 'a hub of activities'. Customer-centred approach is about bringing the next

customer to the hub of the buyer's day- to-day actions. When this happens, the customer's needs

are understood, evaluated, assessed. It becomes easy for the buyer to know precisely what has to

be done to satisfy him. He aligns his every task, every decision by asking just one vital question:

how will my actions add value to the next customer?



Listening to the voice of the internal customer must become a feature of everyday working. The

customer-centred approach involves identifying customer's needs, meeting their expectations,

and matching or exceeding the performance of the competitor.

Recognizing the supplier-customer chain is pivotal to procurement performance improvement

and forms the basis for leveraging competitive advantage. Hence awareness of who are the

internal customers and what are their needs is vital. Unless buyers satisfy the next customers,

the customer-supplier chain within the company will not be able to satisfy external customers.

In business, external customers are the final judge of how well the company performs and what

they say counts.

Customer-centred performance needs an enquiry of fundamental questions about the purpose of

the buyer's function and how it can add the buyer's value to the supply chain. Such an approach

leverages innovation in many ways: it will provide the fuel for identifying new opportunities,

motivate staff and provide direction and focus for speedy proactive improvement efforts. This

needs frequent listening to the next customer, and focused, two-way, collaborative problem

solving, ideally face to face.

Customer-centred approach may sometimes need the procurement department's culture to be

characterized by speed, pro-action, and risk taking. The department needs to grasp new ideas,

knowledge, imagination, continuous regeneration, flexibility, and innovation and discard old

assumptions.

These attributes are necessary but not sufficient. Directionless efforts can simply exhaust the

procurement department's resources. The buyer therefore must be ever watchful to capitalize

immediately on the fleeting opportunities the supply market continuously provides.

Chart 5. Action Checklist on Performance Improvement

1. How is our existing performance?

2. Can we make it OK?

3. Are we making it OK? 4. Have we made it OK?

5. Could we make it better?

6. How should be our future performance?

7. What future requirements will have to be handled?



8. What would be the cost-benefit of improvement projects? 9. What procurement or

other issues preoccupy us most?

10. Are they essential to keep us busy and neglect other issues?

11. On what criteria and benchmarks do the competitors measure supplier

Performance and their own performance?

12. What is our next customer's vision about our role?

13. How would procurement strategies be in the next ten or fifteen years from now in our

industry?

14. Does future management reflect in our current strategies?

15. Are we fully alert to competitor strategies to substitute traditional raw materials being

used in the industry?

16. What types of threats may cause our company to be out of competition?

17. Are we keen on the urgency to reinvent the current procurement strategies?

18. Are we clear about where the next 5-10 per cent compulsory saving will come from?

19. What percentage of our improvement efforts on lead-time reduction,

Quality improvement, on-time deliveries, and price reductions focus on creating valueimprovement opportunity to our next customer?

20. Do our benchmark parameters tally with the competitor's method of benchmarking?

21. Are our actions directed towards preventive measures or crisis management?

Chart 6. Essentials of Improvement Plan

1. Finding and using out-of-industry examples for benchmarking.

2. Creating a 'bounded vision' with suppliers but always keeping the company's vision

intact.



3. Being aware of the hidden agendas and political implications for other functional

areas.

4. Spending a of time solving issues in other activities which surround one's activities

because the1r output is critical to one s Important " objective.

5. Keeping vigilance on symptoms of problems appearing on any activities that appear to

be related to procurement inaction but the causes are actually generated further back on

related activities.

6. Simplifying processes and correspondingly the competences of suppliers to be

broadened and enriched.

7. Redesigning of processes to be targeted at customer satisfaction.

8. Appropriate use of information technology.9. Providing and obtaining of information wherever required.

10. A fundamental thinking of procurement processes with the aim of drastically

improving value addition.

11. Cost and lead-time reduction.

12. Redesigning of activities aiming at breaking functional barriers into cross-functional

teams.

13. Continually being ready for obsolescence.

14. Practising out-of-box thinking.

15. Refusing to be shackled by familiar supply markets.

16. Treating previous failures in improvement plans as learning opportunities for future

success.

17. Making the buyers aware of the implications of delay in decision- making in terms of

cost.

Peter Drucker says that the difference between efficiency effectiveness is: Efficiency is 'doing

things right'; Effectiveness is 'doing the right things'. Many of those who strive to become

efficient do not realize that they spend much of their time doing wrong things. So organizations

are full of people who spend a large proportion of their working lives producing outputs that are

accurate, on time, well presented, and so on; but unfortunately are neither necessary nor used by

the people for whom they were produced



Improving performance in a competitive environment needs severe reforms in the way buyers

act to meet future demands and respond to them quickly. This can only be achieved by

developing listening and communication skills extensively, so that they can perfectly deliver

what their next customer actually needs.

CON11NUOUS IMPROVEMENT

In the past, the game of survival and making profits was simple for companies. There were a

few rules to remain in the competition, but as we head into the twenty-first century the rules and

umpires will be more and winning will be possible only if a company makes the right moves at

the right time.

Opportunities for continuous improvement are points of concern or dissatisfaction which have

been expressed by someone, whether end-customers, suppliers, or internal customers. These

concerns may be caused by a need for improved quality, lower cost, adversarial relationship, or

the availability of new technology.

A measure of continuous improvement is the rate at which the procurement function is

continuously renewing its know-how and regenerating its capabilities in anticipation of uncertainties. Adopting new ways and discarding old baggage must become a top priority.

Understanding the concerns is not enough. Searching for ways to improve should be a non-stop

process. When implementing best solutions in one area is over, the next advance should be

incorporated in the improvement process with a new benchmark and formal performance

standard. Once this cycle begins, improvement breeds improvement.

Continuous improvement refers to the buyer's unceasing efforts to upgrade supplies, suppliers,

procurement process and other related areas in order to meet the next customer's needs, while

concurrently reducing inefficiency, costs and wastage. To achieve significant improvements in

procurement, the buyer must work holistically. There are no quick fixes.

The buyer must also get the low hanging fruit rather than big fruit. His next customer would be

so much happier if he solves his immediate problems. The buyer must also solve problems his

customer points out and not the ones that he himself feels are important.



Continuous improvement helps prevent recurrence and occurrence of mistakes. Preventing

occurrence means doing it right: the first time for all actions. The buyer must understand how to

analyse defects, find root causes, and eliminate problems for good by improving the process.

Preventive recurrence means not putting out the same fires over and over again, but tracing and

correcting the root causes of each error or defect in the process.

Improving procurement performance needs a systematic approach rather than a situational

solution specific to a particular problem. The latter does not add long-term value to the value

chain. A similar problem may crop up at any moment, making the buyers spend extra resources.

Continuous improvement is facilitated by focusing on end-to- end process rather than the

outputs coming out of the small process link. The approach needs a redefinition of success,

unlearning the past, offloading outdated old baggage. Some improvement actions can force the

buyer to discard old practices of keeping suppliers at the arm's length, squeezing them to the last

drop, or doing price reductions based on comparisons of quotations, working on areas

conforming to the buyer's ways, working always jn fire-fighting mood, and neglecting

preventive style of working.

Continuous improvement is distinguished from other attempts to improve efficiency and

effectiveness by its emphasis on daily, incremental forms of improvement. The purpose of all

these efforts is to enhance supply chain value, a concept that refers not only to price reductions

but also to quality, delivery, and flexibility in supply.

Every internal meeting agenda, memo, report, supplier visit, evaluation and improvement effort

should have a bifocal dimension, explicitly considering the impact of today's and future issues.

The buyer should not put in efforts to scratch the surface activities to obtain improvements. He

needs to go deeper, and spend resources, if required, to drastically improve performance and

move in the direction of the vision. The most important requirement is to become nimble to

adjust rapidly to environmental changes and gain from opportunities as they arise.

Continuous improvement should be seen as a dynamic process. The buyer has to fight to

achieve and sustain best performance. It requires long-term planning and constancy of purpose.

It is the result of teamwork within the whole company.



MANAGEMENT BY FACT

Management by fact is the cornerstone of effective procurement performance planning,

decision-making, and improvement. Decisions, if based on intuition or gut feel, and not hard

data, will have enormous consequences, not only on the performance of procurement function

but also on the next customer's performance. It is a recipe for disaster.

Buyers must be able to aggregate, correlate, and creatively synthesize from the mass of data to

identify concrete opportunities. It requires a disciplined and refined approach to information

analysis and a high-order acquaintance with analytic tools.

Once the buyer starts dealing with problems, people within the company and supplier's company

will try to hide the problems and divert attention. By managing such problems with information,

data, and facts, it becomes possible to bring them into the open and tackle them.

Collection and arrangement of data often leads to the discovery of hitherto unseen facts or

clarification of otherwise vague subjects, which in turn results in matters being handled better.

Management by fact will allow openness expose problems and create an awareness to deal with

them. The procurement performance will be improved considerably if problems are isolated and

measures adopted to prevent them rather than cure them later. Obviously, this starts from having

a clear vision for improvement and actions centred on internal customer needs. It should never

be forgotten that internal customer satisfaction is the topmost priority item that contributes to

competitive advantage.

Several good books explain in detail how to use various statistical and other methods to

improve performance by fact analysis. A few methods require measurement of data. Some of

the tools used are: Brainstorming, Histogram, Process flow diagram, Fishbone, or cause-and-

effect diagram, Parrot diagram, etc.

TRAINING AND DEVELOPMENT

Training is necessary to improve performance. It provides a disciplined organized approach to

dealing with performance issues and problem solving. Training requires collection and

evaluation of qualitative, and quantitative information. Buyers must under stand what to

measure, how to interpret the data, use them to /improve performance, how to search for

improvement goals and where to start. Experience shows that training and development of



procurement staff not only helps to become more flexible, proactive, and customer focused but

also acts as a prime motivational tool.

Today the emphasis on procurement staff training has changed from just skill-based training to

bring attitudinal and cultural value change. Every staff member of the procurement function,

whatever his status, should be trained to remain constantly aware of the company's mission to its

customers and strive to beat their previous best performances.

Training can influence the attitude towards the internal customer. It can leverage performance

that hinges on creativity and innovation applied to the procurement process. Continuously

getting training in correcting weaknesses is the best for improvement. It improves the ability to

learn faster and climb the learning curve speedily.

The first step in developing a training programme is to chart core procurement activities, then

build in measures that will at first enable the achievement of consistent results and improve

performance gradually, reducing failures and mistakes. This allows acquiring knowledge that

will enable the buyer to do the right things and develop skills necessary to enable him to do the

right things right the first time.

QUICK RESPONSE

Quick response is usually driven by pressing internal customer requirement and desire to

improve performance. Improving response needs buyers to eliminate communication barriers

and non-value-adding activities: and continuously improve delivery and quality of incoming

supply. Quick response means several things. It means being committed to and being able to

meet internal customer needs faster than the competitor buyers.

Today time is very important in improving performance, along with price, delivery , and

flexibility, and the consequent competitive advantage. Products and services procured fast

determine how the internal customer can meet external customer needs faster.

Quick response leads to focus on the creation of value through every action, built on a process

orientation that recognizes the impact ~f bottlenecks on system effectiveness and tolerates no



wastage. Such an approach may be seen as curious for a buyer to adopt, since buyers generally

prefer to work in a stable and predictable environment. Nevertheless, their ability to adapt to the

volatile conditions in today's turbulent markets requires that buyers and their procurement

processes are extremely flexible.

Quick response proceeds through a constant stream of alterations or adaptations in the

procurement process, decision-making practices and procurement methods. Some will have

widespread repercussions and may require resources. The vast majority, however, are tiny, cost-

less modifications. It is their cumulative effect which is the true source of competitive

advantage.

To achieve perfection in quick response buyers should practise understanding of:

• What their internal customers want.

• Communicate with internal customers to discuss problems.

• Listen to internal customer complaints and comment sympathetically.

• Resolve internal customer problems.

CREATING A CLEAR PICTURE

Creating a clear picture of the current activity for improvement and future value-added activity

is vital for performance improvement. A critical element here is to understand the definition and

identification of value addition from the buyer's point of view. It consists of two parts: The first,

how much he can reduce quality costs. This is a rigid requirement, but it highlights the few

activities the buyers should concentrate on to develop anew platform for improvement. Second,

how much the improvement can meet end customer satisfaction. This criterion is based on

benchmark data.

If the current activities are studied effectively, it will become a valuable case for performance

improvement action by highlighting the quality costs and non-value-added steps. Among the

many problems, it is important to select those that need to be addressed first. Not ~l the factors

can be treated at one time, because of limited resources, but one can look for those factors that

can have the greatest impact and opportunity to tackle those.



In other words, it is important to take care of the vital few rather than the trivial many.

Buyers should list the activities and evaluate their relative importance. There are

numerous techniques to test the importance of an activity. The. simplest way is to get

the procurement staff and the internal customer to rate the important activities from one to five

(1 = least important, 5 = most important) and ask the internal customer to rate the performance

on each of them. Based on this information the buyer can concentrate his efforts and resources.

Following are a few additional guidelines to determine priority items:

• Identify areas for maximum improvements.

• Identify difference between the present and the vision.

• Identify challenging opportunities.

• Identify problematic issues.

• Identify procurement issues that are vital for deciding corporate strategy .

• Identify cost-sensitive operations.

• Identify areas which are unique, special, and different for procurement

performance.

• Identify issues of strategic and competitive importance to the company.

• Identify issues having a significant impact on quality, cost, delivery, or lead-time.

• Identify those activities, which represent (or support) procurement activity as

success factor.

LONG-RANGE VIEW OF GOAL

To become the best in a class, procurement activities must be guided by a set of measurable

goals that emerge from procurement strategy that will serve t~ align the work of buyers with the

company's vision. Measurable goals allow evaluating performance and deciding how and where

they are going from the predetermined path. Without measurable goals, buyers may still work

hard, but go in different directions and miss the target.

Focusing on goals helps the buyers monitor actual performance, make adjustment in priorities,

and reallocate resources, without losing focus. A long-range view of goals helps to integrate and

strengthen efforts towards achieving broad objectives relevant to the entire company with the

increased outsourcing trends.



The role of the buyer is changing from merely bringing goods and services as per the

requirements decided by someone to a leadership role, playing a proactive role in buying quality

goods and services at competitive prices. A long-range view gives meaning to his work and can

guide actions in a rapidly changing competitive environment to confront current issues and, at

the same time, develop competitive strategies for the future.

A source of valuable inforl1lation on how well a procurement function is performing is internal

customers and suppliers. They provide the best opportunity for performance improvement and

to become more effective. The long-range view goes a long way in preventing internal customer

dissatisfaction.

TEAM WORK

Procurement performance improvement needs teamwork. The buyer's actions should be aligned

with the actions of individuals working in own company and supplier's company. Such a

synergy of team work will produce more effective results than the isolated efforts of

procurement staff only.

Jeffrey Funk defines team work as extensive cooperation between employees in a business

process (Funk 1992). A business process is performed by a number of different employees on a

specific product or technology. Since these processes involve multiple people and multiple

business functions {e.g. engineering, manufacturing, and marketing) team work is an important

part of these processes.

Team work is not cooperation; it is just not working together. It is creatively producing better

solutions than those produced independently. This requires deep empathetic listening and

courage in expressing perspectives and opinions in ways that show respect for the views of

others. Out of that genuine interaction come insight, trust, interdependence and learning actions

that are truly synergistic with the company's vision.

Once buyers start working in a team they will develop competence to see their work in the

overall context and develop an ability to seek and offer collaboration unflinchingly. With the

increased product complexity, product diversity, component complexity, technology changes,



and drastic fall in product life cycle, team-based solution to various problems has become

essential to improve performance.

Breakthroughs can be obtained by adopting new mind-sets about possibilities overcoming

established paradigms. Xerox Corporation, winner of the Malcolm Baldrige National Quality

Award in 1989, conceives of its business as 'Team Xerox', explicitly including its suppliers in its

definition of that team. Xerox knew it could never expect to achieve the significant cost saving

it had estimated when implementing its just-in-time inventory systems. Accordingly, Xerox

reduced the number of its suppliers from 5000 to 480, seeking to become one of the top five

customers for each supplier. Further, Xerox requires that every supplier be 'process qualified'.

The vendor certification process involves extensive training for each supplier in quality

management, and it permits Xerox to quantify and analyse each supplier's performance (Snyder

et al. 1993).

Procurement Performance Measurement

In order to compare or determine the results of a process, some kind of measurement is carried

out. Fundamentally, measurement is an act or result of either qualitative or quantitative

comparison between the goal or a predefined standard and actual results. If the result is to be

meaningful, the act of measurement must satisfy the following requirements.

1. The standard or goal must be accurately known.

2. The procedure or method adopted for comparison must be provable.

3. Measurement should be proactive and able to manage the future,

part of a procurement strategy and goal setting role.

Measurement is a fluid, ever-changing process that is constantly re-evaluated and recalibrated as

the activities and realities of organizational life evolve. It is a language of progress, which

provides a sense of where we are and, more important, where we are going. It can guide steady

advancement towards established goals and identify shortfalls or stagnation. To achieve these

ends, it is important to measure the right things for the right reasons.

Many companies can honestly claim that they have tracked cost reductions, supplier quality

improvements, deliveries, and other measures for years. Tracking these measures is one thing

but giving them equal status in determining overall corporate strategy is another-. Measurement

becomes a waste of time with little or no competitive value when a company measures items



that have no influence on its competitive advantage. Measuring the right thing is a good

beginning, but it must be done systematically. Remaining competitive requires adjusting

strategies rapidly.

Goals and objectives are quantitative. They define what is to be achieved, as well as the amount

of achievement. Goals define long- term quantifiable targets; objectives establish short-term

quantifiable achievements. Both are performance indicators or critical success factors and are

measurable.

Procurement performance can be measured in various ways: reduced prices, increased response

time, quality improvements, inward acceptance figures, delivery reliability, etc. The choice is

wide, depending upon what is important to the company.

Generally, performance measures are cross-functional. They must provide focus on critical

processes, enable proactive problem identification and correction and promote continuous

improvement and provide feedback on how well the procurement strategies and objectives are

being met. Buyers in future will have to redesign procurement performance measurement

system to reinforce cross- functional collaboration and continuously improve their customer

responsiveness.

When management fails to sort out strategic priorities, different goals can pull people in

different directions. If production is concerned about large lot sizes and procurement is

concerned about small lots and multiple deliveries, progress toward both goals may be slow and

conflicts will occur.

Sometimes, the aim is cost or quality. At other times, customer satisfaction is the focus. It would

be much easier if one could simply focus on one need, but competitiveness is a moving target.

One rival beaten, another crops up, and then we need a new goal. low many goals are too many?

No one is sure. It depends on level and complexity. Most experts say that five specific goals are

the maximum. Since too many goals can distract, they should be consolidated and prioritised

(Denton 1995).

The radical decision of changing measurement parameters involves a shift from treating

financial figures as the foundation of performance measurement to treating them as one among a

basket of measures. Recent literature is eloquent about the shortcomings f traditional financial

matrices. They might be entirely appropriate for financial goals, but the large issue is whether

the company's overall strategy can be expressed in only financial goals, which is probably not

the case.

Some fundamental characteristics of procurement performance in terms of measurability are:



1. All the purchasing activities can be described, measured, studied, evaluated, and improved.

2. Inputs can be obtained from suppliers, internal customers and output provided to next

customers.

3. It enables understanding of what one's next customer thinks one is supposed to do.4. All activities consume resources (cost).

5. All purchasing activities can be improved through both corrective and preventive actions.

6. A majority of purchasing activities can be benchmarked either internally or externally.

7. Every procurement output can be described with a set of performance characteristics.

8. Next customer needs may be identified with a set of characteristics applicable to their

performance and the relative improvement they attach to the changing level of each.

Aims of Procurement Performance Improvement

The buyer should take a strategic approach towards designing performance improvement actions

towards internal or external customers. They should identify key customers, key outputs, and

performance matrices and measure customer satisfaction. Some of the important aims are given

below:

1. Acting as a catalyst for change in developing a more performance-oriented culture.

2. Developing of supplier partnership.

3. Developing and carrying out tactics (actions) to implement strategies.

4. Elimination of non-value-added work.

5. Enhancing flexibility to deal with rapid changes in market.

6. Fostering team work by linking cross-functions together and focusing on results of the entire

company.

7. Monitoring and controlling number of defective goods to be sent back to supplier.

8. Providing for accurate and objective measurement and assessment of performance in relation

to agreed targets and standards so that procurement staff receive feedback on how well they are

doing.

9. Providing timely and effective solutions to problems.

10. Placing customer needs and requirements at the forefront of a procurement strategy .

11. Identifying and eliminating waste.

12. Identifying and adding focus to early indicators that are correlated to desired results.



13. Improving ratio of purchase value / purchase staff.

14. Improving on internal customer satisfaction.

15. Improving efficiency and effectiveness.

16. Improving delivery consistency.

17. Improving quality.

18. Improving creativity, innovation, flexibility, information sharing, number of suggestions,

productivity.

19. Improving supplier performance.

20. Increasing percentage of discount orders by consolidating.

21. Increasing delivery reliability.

22. Increasing number of hours procurement staff invests in training sessions.

23. Increasing number of supplier certifications.

24. Increasing number of long-term contracts.

25. Increasing motivation and commitment of procurement staff.

26. Lowering inventories/ costs.

27. Increasing number and frequency of delivery.

28. Reducing number of amendments to purchase orders/supplier instructions.

29. Reducing time cost owing to non-availability of products for processing or maintenance.

30. Reducing loss of suppliers from approved list.

31. Reducing damages in incoming supply.

32. Reducing time taken to clear non-moving inventory.

33. Reducing cost of quality.

34. Reducing number of oral orders without hard purchase orders.

35. Reducing product development time by supplier involvement.

36. Reducing purchase order release lead-time.

37. Reducing number of non-compliances to ISO-9000, QS-9000 standards in a specified

period.

38. Reducing number of items on hot shortage lists.

39. Reducing supplier rejections.

40. Reducing errors in purchase orders.

41. Reducing cost



42. Reducing number of suppliers.

43. Reducing internal customer complaints.

44. Reducing expediting situations.

45. Reducing time taken to meet emergency internal customer requirement.46. Reducing material handling.

47. Reducing backlog of purchase orders, supplier payments, etc.

48. Reducing variance against budgeted performance.

Benchmarking

Benchmarking, a term used in land surveying, is in the Concise Oxford Dictionary defined as a

'mark cut in rock etc. by surveyors or to mark point in line of levels; criterion or point of

reference', Benchmarking in land survey is therefore the process of establishing a benchmark, a

reference point against which others can be compared (Lema and Price 1995). Benchmarking is

the search for the best practices that will lead to superior performance of an organization (Camp

1989).

Benchmarking is gaining wide popularity and interest among executives and senior managers

around the globe for its potential in enhancing performance of the company and gaining a

competitive edge. Benchmarking is a continuous process of identifying, comparing,understanding, adopting, improving or using as is, implementing, arid reviewing outstanding

practices from and within the same company or group of companies or from other companies to

help improve performance and achieve excellence. It involves a process of comparing the

methods, practices and procedures to those of best-in-class companies, in order to learn how

they have achieved excellence so that similar goals and performance standards can be set, which

will better help satisfy customer requirements in various parameters.

NEED TO UNDERSTAND BENCHMARKING

Traditionally, companies have been comparing competition on the basis of financial results,

prices, product, and features, marketing and sales strategies.. They have realized, however, that

comparison of outcomes alone is not enough: they should also focus attention on the outputs of

various internal processes, which leads to outcomes. They have to understand how each function

and process is managed not only by a competitor but also in other industries.



As no individual or company can be best in all processes companies must understand they will

always be in short supply with respect to talented men, adequate finances, competitive

technology, versatile machines, competent suppliers, and enough materials that can meet the

needs.

Benchmarking can effectively be used to understand, learn and adopt the practices of others,

how effectively they transform and leverage limited resources to gain competitive advantage.

Every time there is an effort to step up benchmarking efforts, it brings in enthusiasm and

motivation and productivity improvements.

Benchmarking does four things: it sets goals by using the company's vision and mission and

allows learning and unlearning from others, opens doors for continuous improvement and

prepares one to deal effectively with the future. The continuous on-going changes in the

company's markets and at the supplier's end do not allow the buyers to be complacent. Among

the more wide-ranging trends in procurement thinking are: the recent shift from traditional

arm's-length supplier relationship, extensive use of information technology, supplier base

reduction, involving suppliers in design and development, continuous improvement, and

meeting internal customer needs in exactly the same manner as with external customers.

A benchmarking standard acts as a useful decision-making tool to design a procurement

strategy in compliance with the procurement resource constraints. It can also deal with trade-off

evaluation and other circumstances encountered during the normal improvement activities. This

provides the buyer added flexibility to cope with the anticipated problems and unanticipated

uncertainties and map out proper strategy .It reinforces performance improvement activities and

displays clearly the opportunity for plenty more

.

Benchmarking is a non-stop process. The goal is never ending. Once the target is achieved there

is an immediate search for another . Buyers of world-class companies do not rest on their laurels

when one target is achieved. When they come close to it they start working for another they had

already searched, so there is no waste of time.



Benchmarking is a long-term activity without scope for complacency. The road is a perfect

circle with no ends. How fast a company completes the circle is a matter of its efficiency.

BENEFITS OF BENCHMARKING

Benchmarking-

• helps focus attention out of the box and encourages looking for improvement

areas, with a different mind-set and direction;

• allows setting performance indicators to assess whether the present purchasing

performance standards are achieving the objectives set;

• helps set specific goals needed for the chosen performance area;

• helps measure and review goals, milestones, indicators, and ultimately develop

procurement strategy itself for review and upgrading continuously;

• helps learn best practices and motivate staff, to set out the match or surpass it;

• prepares the company for quality certification and quality awards;

• .develops goals and strategies appropriate to the company whatever. may be the

size, its customers, or its place in the competitive space;

• accelerates and manages change;

• helps in realistically understanding one's weaknesses, and capabilities, and opens

up opportunities.

• Prompts deciding on priorities right the first time

• helps in reassessing one's strength and helps to draw a real picture of one's

performance;

• helps create a sense of urgency;

• promotes the training of procurement staff with tools such as problem solvingand value analysis; and

• gives particular attention to management leadership, human resource

management, business process management, customer and market focus,

information utilization, and problem solving tools.



Performance Improvement Actions and Feedback

Many procurement strategies have been criticized as being short- sighted and focused on the

near term. One manifestation of this syndrome is the excessive attention to 'fire-fighting' and

achievement of immediate results. One key to breaking this pattern and building a strategic

perspective is to strengthen the underlying activities instead of each specific output and

deviation.

Three failings which can prevent a procurement function from systemically improving its

performance are:

1. Failure to identify critical success factors of procurement function leading to a

company's competitive advantage.

2. Failure to measure the right things.

3. Failure to apply a robust improvement approach that builds an understanding of

fundamental root causes for poor performance.

Generally, performance improvement can be simplified through the application of three simple

concepts:

• By focusing on the customer.

• Continuously improving work processes.

• Providing a supportive environment for building the commitment of everyone

with the procurement function.

Once these requirements are understood and an appropriate environment is established,

improvement becomes the core of any activity, typically through cross-functional teams with

continuous improvement and with the Plan-Do-Check-Act (PDCA) model serving as a road

map.

Normally, failure to improve competitive advantage through procurement actions does not come

from failure to do hard work. It stems from the fact that buyers do not know how to increase

advantage through improving relationship between buyer and supplier on one side and internal

customer on the other side.

Buyers can measure performance and satisfy the next customer , provided they know what and

why they are measuring and the output they measure is acceptable to the next customer. In fact,



since we know that next-customer orientation is the key to procurement performance

improvement and quality cost, buyers should have a scoreboard to measure their process outputs

in relation to these objectives. They must also remember that:

1. Objectives should be measurable.

2. The number of key objectives should be manageable, for example, four to five.

3. They should acquire proper tools and appropriate support to work on these objectives.

4. Any improvement in efficiency and effectiveness which does not contribute to the vision

is not an improvement but a change for the worse.

5. Data are important; data collected on procurement process ~l within the plan can give

more importance to facts rather than qualitative judgement.

6. If one accepts the premise that cross-functional team members' involvement is essential

to the improvement-process, one must know what role each must play in this game and

how to play it as a team member .

7. One also needs a scoreboard to see how one is doing and record one's progress.

If result cannot be obtained through these acts, it can be concluded that improvement activities

have been done without much thought given to them. When we verify results with set

objectives, we do not merely look them over. The verification activates a process through which

we rethink and reflect on our own actions.

Actions to Ensure Effective and Systematic Procurement

Performance Improvement

1. Conduct an assessment to establish the need for procurement performance improvement.

2. Develop a clear idea of the outcome of the performance improvement effort.

3. Analyse the current situation to understand what changes are needed.

4. Prepare a systematic plan to discern how the performance improvement effort will be

managed with the outgoing demands of the operation.

5. Design methods to evaluate, learn from, and stabilize the new procurement improvement

process.



A Seven-step Approach to Procurement Performance Improvement

STEP 1: DEFINE THE OBJECT1VE

i. Define the problem in terms of a gap between what is and what should be (For example,

manufacturing reports on excessive number of supply rejections. The buyer's objective is to

reduce the number of defects in the incoming supply).

ii. Document why it is important to be working on a particular problem.

iii. Explain how you know it is a problem, providing any data you might have that supports this.

iv. List the next customer's key performance characteristics.

v. State how closing the gap will benefit the next customer in terms of these characteristics.

vi. Decide what data you will use to provide a baseline against which improvement can be

measured.

vii. Develop any operational definitions you will need to collect the data.

STEP 2: STUDY THE CURRENT SITUATION

i. Map the process

ii. Identify any variable that might have a bearing on the problem.

iii. Collect the data and summarize what you have learned about the variable's effect. on the

problem.

iv. Determine what additional information would be helpful at this time.

STEP 3: ANALYSE THE POTENTIAL CAUSES

i. Determine the potential cause of the current condition.

ii. ii. Determine whether more data are needed.

STEP 4: IMPLEMENT A SOLUTION

i. Develop a list of solutions to be considered.

ii. Be creative.

iii. Decide which solution should be tried.

iv. Carefully assess the feasibility of each solution, and the likelihood of success.



v. Determine how the preferred solution will be implemented. vi. Implement the preferred

solution.

STEP 5: CHECK THE RESULTS

i. Determine whether the actions in Step 4 were sufficient.

ii. Analyse the results; determine whether the solution tested was effective:.

iii. Repeat prior steps as necessary .

iv. Describe any deviations from the plan and what was learned

STEP 6: STANDARDIZE THE IMPROVEMENT

i. Institutionalize the improvement.

ii. Develop a strategy for institutionalizing the improvement.

iii. Implement the strategy for and check to see that it has been successful.

iv. Determine whether the improvement should be applied elsewhere and plan for its

implementation

STEP 7: ESTABUSH PLANS

i. Determine your plans for the future, decide whether the gap should be narrowed further, and if

so, how another objective should be approached.

ii. Identify related problems that should be addressed.

Documents

Improving Procurement Performance