CPOs and CEOs love numbers. After all, what doesn’t get measured won’t get managed. The question is: are you really measuring what you need to? If you select the wrong key performance indicators (KPIs), a skewed perspective on your operations may endanger the implementation of your corporate strategy.
CPOs constantly crave for industry benchmarks that would give unquestioned proof of their effectiveness. Yet, such generic comparisons often make little sense, even if done within a single industry. Well-chosen KPIs should ultimately reflect the procurement’s ability to implement the corporate strategy, not a good rank among peers that may lull you into a false sense of security.
Don’t go the easy way and select indicators just because you can find external benchmarks – choose them based on your corporate aims and then concentrate on their development and not the absolute value. Keep them as simple as possible – mostly top management simply need to know the coverage of a given trait or process. To give you some ideas, I have listed typical areas of interest based on the overall corporate strategy.
New suppliers are a potential risk source and can cost you dearly if not vetted with care
Growth and expansion
Growth and expansion to new markets put strain not only on the internal organisation, but also on the supply chain that needs to keep up with the increase in demand. Both have to develop in tandem and be closely supervised by top management.
Key issues to focus on are supplier capacity, finding, qualifying and developing new suppliers to ensure uniform quality, and – last but not least – preventing risky suppliers from entering your network.
Mid- to long-term capacity forecasts are often hard to obtain. Nonetheless, you need to know how many of your suppliers can expand their capacity, by how much and how fast, so that you can map potential future bottlenecks. If you expand geographically, it is also worth reporting which of your suppliers have operations in the target countries or are willing to follow in your footsteps.
New suppliers are a potential risk source and can cost you dearly if not vetted with care. What fraction were evaluated in-depth (quality, financial stability, procurement, innovation, etc.) during selection and on boarding? How many have been rejected due to inadequate processes? If too few or none, your standards may be too weak or not enforced stringently enough. How many suppliers were actively developed in the last six months?
More to the point, how many tasks were assigned and implemented and how many are still outstanding?
If you don’t monitor the above, you run a risk that your supply chain will not be able to catch up with the high growth of your organisation, leading to capacity bottlenecks, delays and quality issues. Firefighting is likely to eat up whatever profits you were expecting from the expansion.
Cost leadership benchmarks
Since components and raw materials usually constitute about 70 percent of the final cost of production, savings generated in the supply chain will have twice as much impact on your bottom line than any internal cost optimisation. Cost leaders must therefore concentrate on supplier collaboration: risk sharing, proactive optimisation initiatives and systems integration with the suppliers.
To ensure of adequate risk sharing you should establish how many of the products have index-based variable pricing and how many of your suppliers agreed to sign a risk sharing and/or a back-to-back contract.
You also need to identify cost-cutting initiatives initiated by your suppliers, and subsequently, how much predicted savings these yielded. It is important that you find suppliers willing to show you their cost structures and equally as willing to partake in common optimisation exercises.
To monitor the systems integration and processes of your suppliers, you must identify how many have direct interfaces to your ERP systems to streamline the procurement and delivery process (per process – forecasting, planning, orders, dispatch, and so on). A golden standard for identifying top performers and laggards in production planning, scheduling and logistics is the MMOG/LE evaluation. How many of your suppliers have been evaluated and what are their scores?
If you bypass these steps, in the best-case scenario, you are missing out on cost reduction opportunities. In the worst case, you will be outperformed by your competitors who will offer cheaper solutions.
Innovation and technology
Innovative firms rely heavily on the solutions and know-how sourced directly from the supply chain and are thus entering a much closer relationships with their suppliers. Many typical procurement metrics fail – or may even be destructive – if a company follows this strategy. These include, for example, the proportion of dual or multi-sourced products (supplier dependence), generated savings as a percentage of spend or even the total number of suppliers.
Supplier performance evaluation should be focused not only on finding and promoting innovative suppliers, but – equally crucially – increasing supplier resilience and stability to ensure that they stay innovative.
Initially, evaluate the processes and R&D organisation of your key suppliers, then cross-check the results with the new suppliers you’re taking on. What’s the average time between minor and major product improvements offered by your suppliers and the value added?
In terms of the resilience and stability of your suppliers, they must have approved mitigation plans for not only the most common risks, but the highest expected impact risks too. You must then evaluate suppliers financially and establish which have a formal and tested set of business continuity plans for relevant major risks.
The perils of misapplying performance metrics will lead to increasing frustration of the procurement department, while missed opportunities to source innovation will increase strain on the R&D department.
By focusing on key areas, such as growth, cost or innovation, and scrutinising your suppliers in respect of these priorities, it is possible to grasp a more accurate measure of your company’s strategy and assess the impact your supply chain is having on it – positive and negative.