Prime Advantage Blog

Tie Procurement Metrics to Your Business Strategy

Thyra Nelson on Nov 24, 2015 10:13:28 AM

We all know business metrics are important but the challenge is determining which ones to analyze and how to better use them to reach your company's goals. Metrics should be set by your overall company strategy and not be dictated by how easy they are to measure, or by what data is readily available. Gauging your performance in a way that doesn't support your strategy will create activities that could eventually undermine your overall performance.

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It's smart to track your on-time deliveries and to hold your suppliers accountable to their commitments. This data is very easy to find and monitor. But have you asked yourself if the materials they are providing are making your product better and positively impacting your customers' perception of your brand? This piece is difficult to assess, but may be the most critical item to your company's success. If on-time deliveries are costing you in product quality then your metrics are negatively impacting your business. Also, make sure the measures you implement exist to help you improve. If you are evaluating items solely for interesting tidbits, you can probably let those go.

If you are evaluating items in order to improve and ultimately add value to the process or bring dollars to the bottom line, then you are on the right track.  But beware -- if you are measuring something to improve yet there is no actionable follow-up to impact the process, then all you're doing is beating yourself up. An example of this would be if you're holding your suppliers to an on-time delivery or full delivery requirement, but the product they are sending is not immediately consumed in your operation. You aren't improving anything for your company with this measure, you are simply holding onto inventory longer than you need to in an effort to keep your supplier accountable. But if you are adjusting your inventory system to only keep small quantities on hand of the materials that are quickly consumed, then you only need to maintain this metric on those suppliers.

If you don't intend to react to the findings in your metrics then you don't need to waste the energy tracking down the information and analyzing it. Your end metric is the equivalent of a participation trophy, it's great to put on the shelf, but it is there just to collect dust. If your measures are not driving progress toward a valuable business strategy then they serve no purpose.

A tricky metric to pull together is Total Cost of Ownership (TCO). But if done right, it provides full sight of a raw material decision's impact. Purchase price is an easy data point to track; you can find a great value and change suppliers to maximize your budget. But if your warranty claims spike because that cheaper part is failing in the field, you just lost all of those savings and could potentially damage your brand's reputation. Many times in these scenarios someone could still be celebrating the great purchase price on the frontend of the process and not take the cascading effects into consideration.

You must first understand your company's strategy and then figure out how your suppliers can help you achieve this plan. Create metrics that can lead to actions to keep your procurement operation running smoothly and delight your customers. Sometimes keeping sight of the hard to measure items can really change your day-to-day operations and bring value to your organization.

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Topics: Procurement

Thyra Nelson

Posted by Thyra Nelson

Thyra is the Marketing Manager for Prime Advantage, a Chicago based Group Purchasing Organization for mid-market manufacturers. She works with the group’s Endorsed Suppliers to share products and services with Members.

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