MR TEJAN JOBE

TRAINER/CONSULTANT
PROCUREMENT AND LOGISTICS
MANAGEMENT
AND
BUSINESS MANAGEMENT
 INTRODUCTION
As an introduction the first question that comes to mind is
why do we need to monitor or measure performance in
an organisation. In considering performance
management there is the need to understand the
meaning of effectiveness and efficiency before moving
on to consider performance measurement.
 Effectiveness is measured by the extent to which the
organisation’s requirements are met over time.
 Efficiency is measured in terms of how economically
the organisation’s resources are utilised in achieving
the organisational objectives.
These two terms identify the dimensions of performance
measurement for the various management functions in
an organisation including procurement.
 KEY PERFORMANCE INDICATORS
The selected performance indicators are called key
performance indicators (KPIs).
 WHY MEASURE PROCUREMENT PERFORMANCE
Increasingly both public and private sector organisations
are taking advantage of the gains that good
procurement can bring in terms of improved services,
and product quality and contribution to the bottom line.
Within such organisations it is recognised that good
procurement does not ‘just happen’ and that there are
many factors which need to come together for the best
results to be obtained. Such organisations also
recognise that, as with most aspects of business,
procurement performance needs to be measured if it is
to be recognised and understood.
APPROACH
Whilst there can be many facets in the measurement of
procurement performance, we will however attempt to
approach the subject for now from two basic
perspectives.

 Measuring procurement performance as a

business function within an organisation.

 Measuring performance of the suppliers to an

organisation.
 Procurement performance management within an organisation
1 Corporate 2 Procurement 3 Procurement
strategic strategic management
plan targets challenge

Plan methods
to achieve 4
7 targets
Implement Decide
6 Map process 5
performance staff
elements
plan roles

1. performance Deliver
Management
of procurement performance
of each
8 8a function targets 9
process
2.suppliers
performance
3.buyers Manage and
Manage
11 performance communicate 10
continuous
results
improvement
 Measuring performance of the procurement function in an
organisation

In measuring this performance we consider how effective is the

procurement function in the organisation in which it operates. This
is important because it affects the overall profile of the function
and the way it is perceived by management and other
stakeholders. In setting the key performance indicators for the
function, objectives have to be established and thereby set targets
to achieve those objectives. Performance will measured base on
the level efficiency and effectiveness in achieving the set targets
and objectives. A performance rating could be adopted and
allocated to each performance target indicating the level of actual
performance for a given period. A composite of the main
objectives of the procurement function for which specific
performance targets are determined depending on the strategic
requirements of a particular organisation are as follows:
 TO SUPPORT THE ORGANISATION’S OPERATIONS WITH AN
UNINTERRUPTED FLOW OF GOODS AND SERVICES.
This is the fundamental of all of the procurement function’s
objectives. In a logistical sense, this is the ‘raison d’etre’ for the
existence of the function. Usually the responsibility for the
performance of the function is located in a single Unit, thereby
facilitating co-ordination and control of its activities.
Measureable performance targets would include:
 Performance relevant to agreed service levels and their impact on
cost of operation in terms of stockouts, overstocking, rejects and
prices.
 BUY WISELY
Buying wisely involves a continual search for better values that yield
the best combination of price, quality, and service relative to an
organisation’s needs. This frequently involves co-ordination with
other departments in defining the need. It also involves co-
ordinating and reconciling the need for materials with the financial
capabilities of the organisation and that of the suppliers
NB. Buying a silver-plated item when a copper-plated could perform
perfectly well is usually not buying wisely
 TO KEEP INVENTORY INVESTMENT AND LOSSES AT A
PRACTICABLE MINIMUM LEVEL.
Although maintaining a large inventory is one way to achieve an
uninterrupted flow of goods and services, it is also costly.
Conventionally, most organisations pay an indirect cost of approx.
25% of inventory value per year for the convenience of having the
inventory available. Thus the job of the Procurement Department
is to maintain a reasonable balance between inventory level
required to support the operations of the organisation and the
cost of carrying the inventory. Through proper buying, packaging,
and storing, it must also be Procurement’s objective to minimise
losses that occur as a deterioration, obsolescence, theft etc.
 TO ACHIEVE MAXIMUM INTEGRATION WITH OTHER
DEPARTMENTS OF THE ORGANISATION.
It is important for Procurement to understand the needs of other
departments so that these needs can be translated into materials
and services support actions. The most common types of support
include giving information and data regarding price, services,
material availability, and status of orders
 TO DEVELOP RELIABLE AND EFFECTIVE SOURCES OF
SUPPLY (DEVELOP RELIABLE AND EFFECTIVE SUPPLIERS)
It should be the responsibility of Procurement to develop a cadre of
cooperative and willing suppliers who are prepared to help solve the
organisation’s procurement problems and to minimise its materials
and services related costs.
NB Progressive Procurement Managers today tend to “buy suppliers”
as opposed to simply “buying products and services”
The identification, selection, and in some cases development of
competent and responsive suppliers is a Procurement Manager’s
paramount responsibility.
Good relationships with suppliers are imperative and good
relationships with potential suppliers are invaluable.
It is sometimes difficult for an organisation to perform optimally if it
cannot depend on the performance of a reliable contingent of
suppliers.
Performance of the function will be measured against the level of
achievement of the above using established agreed data.
 TO ADMINISTER THE PROCUREMENT FUNCTION IN A
PROFESSIONAL AND COST EFFECTIVE MANNER
Management will expect that all procurement objectives and targets
be achieved in a professional manner at a cost that is
commensurate with their value to the total organisation.
This involves the development of highly trained and competent
personnel who are motivated to perform their responsibilities
effectively with the overall goal of helping the organisation maintain
and efficient and effective position in its industry.
A part of this composite effort also involves the development of
operating policies and procedures that facilitate the
accomplishment the objectives and relevant performance targets at
the lowest and reasonable cost.
The targets relevant for performance monitoring are inclusive and
indicative in the above specific objective.
 MEASURING THE PERFORMANCE OF SUPPLIERS TO AN
ORGANISATION

 Why measure suppliers performance

It is estimated that the average business spends about 60-70% of its
total operating costs on bought-in goods, works and services. It is
therefore clear that the performance of these external suppliers will
have a significant effect on both the real and the perceived
performance business or organisation. This therefore presents the
procurement department with a real challenge.
The challenge is to secure the best suppliers, in terms of value for
money, and to supply goods and services to the organisation. This
can only be achieved if:
 The supplier’s abilities and performance are measured

 The measurement takes place over time to show trends

 The measurement uses sensible and appropriate tools

 The results are compared with past performance and other

benchmarks such as competitors or published indices.
 The impact of supplier performance on the
organisation
The impact of the supplier’s performance on the success of the
organisation may be considered in terms of the traditional ‘five
rights’ of procurement.
1) The right price: Reductions in price by procurement will impact the
bottom line positively.
2) The right quality: Quality improvements helps in branding and
satisfy consumer demand for reliability and service. Quality can
save costs, hence the importance of early supplier and
procurement involvement in design and specification.
Reduced product failure helps with warranty claims and
consumer perceptions. Fixing quality problems is more expensive
than preventing them.
3) The right place: Failure to deliver to the correct location becomes
critical as inventory reduces.
 Cont’d
4) The right quantity: It is the key objective of many organisations to
reduce inventory and this has direct benefits in efficiency and cost
reduction. In manufacturing and retail the move to JIT and lean
production is dependent on suppliers’ abilities to deliver the
needed quantities as and when required.
5) The right time: Failure to deliver at the right time becomes critical
as inventory reduces and JIT-type systems are introduced. Late
delivery can cause severe production or service problems.
Clearly if the above ‘five rights’ are effective then the impact on the
business is positively significant. Good suppliers allow an
organisation to perform efficiently and effectively, and to focus on
core its core activities. That is the organisation does not need to
worry about supplier performance and quality which are, as far as
possible ‘right first time’ that leads to lower costs of operation.
Conversely if suppliers perform poorly, then service to customers
suffers along with product or service image. Also, management
time and resources will be required to improve the situation.
 Basic measures of supplier performance
It is already evident that the procurement function is increasingly
expected to measure the performance of suppliers. However the
amount of direct effort required to put into the scope of the
measurement system will depend on the importance of the purchase
to the organisation in terms of:
 Criticality of the of the order to the procuring organisation

 The value of orders to be placed

 The time and resources available to continually review and update

the measurements

 Whether the purchase is a one-off or an on-going requirement

 Factors outside the supplier’s control

 Basic measures of suppliers performance
Typical areas for analysis using supplier performance measurement
ratings.
Delivery: Often measured as percentage received, in a stipulated
acceptable condition, at the agreed time. Sometimes more complex
to calculate on service contracts.
Quality: On manufactured items failure or reject rates are often used,
while service contracts measure the recorded fails in service.
Increasingly, performance is related to quality standards such as
ISO 9000 or management systems such as Total Quality
Management (TQM)
Service: Often more subjective, but tries to measure acceptable
performance in areas such as after-sales service, response to
problems, dealing with emergencies etc.
Pricing and Costing: How the supplier does it prices, and where is
he in the market? Will he provide information on costs breakdown?
 Generic methods for supplier performance measurement
Measurement will identify weaknesses on the part of the supplier. It
will thus allow the supplier the opportunity to improve their
performance if found wanting. It will also allow the procuring
organisation to seek concessions and/or compensation for poor
performance.
There are different methods that can be used to measure suppliers
performance:
 Cost ratio rating is a measurement system for supplier
performance, which applies a cost to a performance failure. For
example, ‘a late delivery could be costed as D150 per occasion’.
These costs are then totalled for each supplier.
 Categorical rating is a measurement system for supplier
performance that identifies a series of measurement categories and
then rates suppliers against each category using subjective criteria.
 Standard is a commonly used term that usually means an agreed
organisation, rated using a national or international standard such
as ISO 9000.
 Measurement methods cont’d
 Statistics –based: Relies heavily on the availability of statistics, and
is therefore to measurable or transactional activities.
A simple rating method in which a few selected categories are
measured using figures to denote performance levels. Another
statistical method is the cost ratio rating in which attempts are made
to convert the performance failures into actual cash cost to the
organisation.
 Perception-based: Is concerned with perceptions and opinions. Can
be an easy way to undertake a simple review of a supplier’s
performance. A simple rating method in which opinion is sought on a
few selected categories. Based on for example – good, poor, accept
 Research-based: Checking out a supplier’s performance through
research that would include: financial analysis, references, hitorical
performances, and reputation.
 Standards ad accreditations: Using supplier’s accreditations as a
basis for performance. ISO standards are recognised worldwide but
there may be internal or national schemes that could be used eg
ISO 9000/ISO14000 or supplier’s total quality management systems
 Simple vendor (supplier) rating as an example of supplier
performance measurement using statistical – rating method.
a) Express each
Factor Score Target Score factor as
proportion of 1
Quality (by delivery) 15 15 1.00
(one) For
Delivery timing 13 15 0.87 example, after-
(by delivery) sales services is
half of the
After sales service 20 10 0.50
desired
(by days) performance
Price (by dalasi) D600 D590 0.97 target so it
rates only 0.50
b) Add up the
Total 3.33 scores in this
Target 4.00 case it is 3.33 c)
Actual 3.33 The max. target
is 4 d) Actual %
Overall assessment 83%
achieved
NB Serious discussion with supplier on service 83%(3.33 as a %
improvement is required. of 4)
 THE END