Key Performance Indicators: The Good, The Bad, The Different

KPI

I can even hear you thinking… “Not those! Not again!”… A sensitive subject, when it comes to your OWN performance measurement. Let’s set the rules now: this time we talk about THEM, not US.

According to Investopedia: “Key performance indicators (KPI) are a set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their strategic and operational goals. KPIs vary between companies and industries, depending on their priorities or performance criteria.” StrategicContact, talking about KPIs of a call centre, say that “it’s not just about productivity any more”.

The most popular KPIs that are traditionally assigned with procurement, are as follows:

  1. Total Cost Savings;
  2. Quality (IF part of OTIF, 6sigma numbers in Defects Per Unit or Defects per X opportunities);
  3. Delivery (OT part of OTIF);
  4. Cost avoidance;
  5. Implemented cost reduction savings (to keep it short, it shows how successful is the project management or budget implementation);
  6. Procurement Cycle Time (time to market, P2P cycle/cost and similar);
  7. Percentage of suppliers accounting for 80% of the spend;
  8. ROI;
  9. Managed spend versus Maverick spend;
  10. Contract compliance.

Different companies might calculate and interpret them differently – it all depends on the overall company’s goals. Some companies measure some additional factors: Inventory KPI’s (turnover ratio), Employee Learning & Growth KPI’s… The most important part is that everyone in the company is aligned and understand what and how and why they measure.

Available primary data quality is also a vital factor, but this post is not about that.

Like StrategicContact, I also think it is not only about productivity, hard cash. Those are very important, no arguing about that. However, they are consequences of the way people work, the behaviour (theirs, not ours, remember?). That is especially important in current business world, where the change is inevitable.

While creating reporting systems for procurement department and / or function, I have additional categorization:

  1. Efficiency (or productivity – everything, that is mentioned above and is relative for the business);
  2. Discipline;
  3. Accuracy.

Discipline part is very important, when you are trying to implement any change. I have heard sayings “no PO – no Pay”, I have implemented supplier communication groups (e-mail distribution groups), which were helping to implement internal policies with help of external influence. Sometimes, this calls for some resistance from other departments, because in some occasions it shifts the problem from procurement to finance… Having proper KPIs and reporting system in place, allows you to keep up with the T part of SMART requirements: timeliness.

Example: let’s say, your database on item level includes information on minimum delivery time. Which means, you know, that from the moment PO is issued to the time items can be delivered, there cannot be less than 10 days (physically impossible). “No PO – no Pay” policy would pick up only the cases where the items arrived, payment term has come to an end and there is no PO on the system even then, many times more than 40 days later. Consequences, that will bring you negative financial impact (wasted working time of finance, procurement department, non-compliance, etc.). What about all of the POs, that were raised any time before the day 10, but after day 0 (when they were supposed to be raised)? You would never pick up those. If the change you are trying to implement says, that you need to raise a PO as an official order to a supplier. Discipline KPI might pick up all POs, where the difference between PO date and “date required” or “delivery date” is shorter, than minimum possible delivery time. It will definitely pick up all POs, which are raised at the time of receiving goods (if you do not yet have policy of not accepting goods, which do not have PO). Overall, you need to be able to get the alerts before non-compliance turns into costs and in such a way, that you would be able to correct the behaviour that causes all the troubles.

Accuracy is something, that should keep your system set up in tact. Take the example above. If you have minimum delivery times set up, but you notice, that recently, quantity of faster deliveries, especially with one supplier, goes up by 50%. That might trigger your attention to the correctness of system set up. It might indicate, that the person, raising the POs, started doing the job worse, that workload suddenly got too big. But it also might mean, that the supplier opened a warehouse closer to the delivery point and always keeps safety stock in place to serve better. That would require updating the buyer’s system data. If that was not done, your accuracy KPIs will immediately show that.

To sum up – if the reporting and KPI system is set up properly, you will be able timely pick up “the different” and, after asking the right people the right questions, you can decide if it is “the good” or “the bad”.

Thank you for reading! Do you do it differently? Please share in the comments below!

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Key Performance Indicators: The Good, The Bad, The Different

Rebates 007: A License To Steal???

pocket picking111

I do not like rebates much. If at all.  Having seen the rebate system being so popular among businesses, I started doubting myself. What if it is only me? What if I do not understand something?

I have shortly looked into quite a few articles  on this subject. Outcome Number 1: googling “procurement rebates advantages” (or any similar wording) give you no straightforward benefits of having it.

So what are the occasions, when businesses use rebates? Outcome Number 2:

  • if the quantity to be purchased is not known.
  • if you want to fund purchasing activity – whatever it is: GPO, “non-profit” organization, department – you name it.

How well do you know your company? Is it possible, that your forecast can go so terribly wrong? If it is me negotiating the price, I want best price available at that moment. If the product has to be produced – most of the times it will be cost plus margin pricing model. You can analyse the costs, might define the margin and try to influence them. I do understand price differences due to production run size, production planning flexibility (while everything else stays the same). And here is my question Number 1: can you then please show me a supplier, who will plan a single production run to satisfy your annual quantities? Thought so. That means – volume based rebates loose their sense. Yes, it is important to understand, what makes the deal attractive to the supplier. Time commitments, quantity commitments – but I am talking more about insurance from losses to the suppliers.

Sample. A deal of estimated 3000 t of plastic packaging is on the table. Supplier suggests a price with 3% rebate if 3000 t is reached.

  • Scenario 1: Buyer accepts the offer and signs the deal. The year finishes with a balance of 2900 t. Will the Buyer order additional (not needed at that time) 100 t of packaging just to get the rebate? Will he decide to loose the rebate? Both cases – the loss is biggest to the buying organization. Keep in mind, that, additionally, Supplier was using those 3% of Buying organization’s money as his financial asset.

  • Scenario 2: Buyer asks, WHY is it 3% and HOW will Supplier be able to give that rebate. Supplier explains, that he would need X tons of main raw material and that they would fix prices now for that quantity, because they are expecting price increase. So, if they get Buyer’s commitment to buy all the quantity, they would eliminate the risk of overstocking and would be able to offer a rebate. Buyer then suggests to commit to buy all the quantity, even if it means the contract lasting 13 or 14 months instead of 12, but in return would ask for 3% discount from the very start. Supplier agrees with these conditions and the deal is signed. The year ends with 2900 t being sold. Buyer maintains commitments and finishes buying the quantity in another 6 weeks. No inventory overstocking, no financial loss, no false commitments.

Now the “funding” question. It gets a bit tricky here. It is a question of perception. Why would you refuse to pay for service, that you believe, brings value? Especially, if the price is transparent and fixed? Many times people choose to opt for “free services”. Guess what – there are no free things in business world. Well, fine, almost. It is up to you to choose if you want to know how much you are paying, or would like to convince yourself it is “free”.

Here is a sample. Take any of GPO companies. “Non-profit” GPO companies. They have a limited number of people working to get best deals for their members. They have limited number of categories with limited number of suppliers. They have a budget, that covers their business costs. They are funded by supplier rebates. Let’s say, the rebates for the purchases of the first 50 companies, that signed up for the deals, bring them to break-even point. Additional companies, signing up for the deals, do not bring any additional costs. But surely, they bring profit. Question Number 2: where does that profitable “non-profit” go?

So much for “benefits” and use of rebates. I managed to find, however, negative parts of it:

  • There’s always a risk that the rebates won’t be paid or remembered.
  • There’s a risk that the price will be inflated in order to cover a rebate to be paid later.
  • There is the time value of money. The supplier is using the rebate amount as their own money for a year. Should that not have it’s own interest rate, payable to the Buyer?
  • If the rebates are not distributed to the end users’ cost centres, it can cause friction internally.
  • It encourages wrong behaviour from Buying side – they might end up with overstocking inventory in order not to loose the rebate.
  • It creates commitments to a supplier. Rebates are a tool to influence your future buying decisions. How restricted do you want to be?

Procurement Heads published an article about John Lewis. Speaking to The Daily Telegraph, The Forum of Private Business, called demand for rebates “pocket picking“.  TESCO’s (and other giants’) behaviour is called “bullying”. Why is it still so popular?

Rebates 007: A License To Steal???

Can Procurement Protect From #Liftstonowhere

lift to nowhere

This is a lift. It takes you nowhere. Really – NOWHERE. It does not move at all. It is one of the EU funded projects. I am not discussing ONLY EU funded projects. Nor am I disputing EU as a structure. However, the facts are plain and simple:

  • it happens with public investments;
  • it happens, just the same, with private investments – maybe not at such a scale;
  • it happens globally (see an article about China’s achievements).

Questions, that I have, are mainly about justification, will, rules and attitude. If you have OJEU regulations for public procurement – will they protect you from fraud or worthless, unjustified spend? Bribery is a capital crime in China, which is punished by capital punishment. Does that protect from it happening? If there is a will, there is a way. To do both good and bad things. If a person is indifferent to things he sees happening around (or afraid to speak up – I know, there might be reasons), if we do not change our attitude – procurement efficiency alone, however good it is, will not be enough. What are your thoughts?

Can Procurement Protect From #Liftstonowhere