Metrics that Matter: Measurements that Demonstrate Purchasing Value

Transcription

1 : Measurements that Demonstrate Purchasing Value How the right metrics can improve the value equation for purchasing and build alignment

2 Advanced Purchasing Dynamics (APD) is a leading provider of purchasing services and software to manufacturing companies across the US. Forwardthinking clients partner with APD to make their investment in Purchasing a competitive advantage. APD works with clients to build solutions that provide access to the people, intelligence, tools and technologies needed to facilitate an increase in margin, access to supply base innovations, and a reduction in risks across the supply chain. Collectively, these solutions enable clients to elevate the role of Purchasing, and increase their purchasing ROI. APD is headquartered in Plymouth, MI contact@apurchasingd.com

3 Background We sureveyed CEO s and other C-Suite members and found that 58% of CEO s believe that their purchasing organizations are not creating value that drops to the bottom line and 52% believe that Purchasing is not aligned with the demands that customers place on the business. To date, we have published the following papers to address the survey findings: What CEO s Want from Purchasing and Are Not Getting The Key to Relevancy: Building Alignment with Your C-Suite, Stakeholders and Suppliers Purchasing Can Have it All: How Collaborative List Processes Deliver Results and Build Alignment This paper is a continuation of the series. Overview Over the past twelve years of practice, we have learned that the metrics that are being used by purchasing have a direct correlation to effectiveness in delivering bottom line value. Over the course of numerous engagements, we ve correlated 120 purchasing organizational dimensions against cost control performance and found that the following items are highly correlated to good performance: Well defined key metrics Accurate and timely tracking of status against key metrics Clearly defined roles and responsibilities Clearly defined performance objectives for all individuals in the organization Ongoing employee performance management This paper explores how to establish effective and efficient metrics that deliver value while building alignment within the company and with the supply base. 3

4 Characteristics of The APD Competitive Advantage Survey evaluates a number of factors regarding metrics. In the implementation of metrics, top performing purchasing organizations have metrics that are: Strategic Tied to the CEO s vision and strategy Aligned Support the CEO s vision and strategy, and priorities of other functions within the company, as well as ensuring the supply base is aligned with both Comprehensive In addition to results metrics, process and forecast metrics are also defined Owned Clear ownership exists for the metrics Managed There is a clear method for managing and reporting status of the metrics Our paper The Key to Relevancy: Building Alignment with Your C-Suite, Stakeholders and Suppliers provided insights into developing strategies that improve alignment within the company and with the supply base. Our focus in this paper will be on comprehensive, owned and managed metrics. 4

5 So, what is the alternative? There are three types of objectives in a comprehensive program: A comprehensive set of metrics tracks goals you want to achieve, how you will achieve them and items that might impact your success: Results - What you want to achieve. These metrics track the overall progress towards a goal or objective. Examples: Savings --- dollar value of savings implemented Quality --- supplier parts per million Delivery --- % of shipments received on time with the correct quantity Before setting objectives around a new results metric, the metric needs to be tracked for a period of time to ensure accurate measurement, to understand how the metric is trending and to allow team members to become knowledgeable and comfortable with the metric. Process How you want to improve the results metrics. Examples of process metrics for the savings results: Conduct 15 VA/VE workshops --- metric is # of workshops held Market test 6 commodities --- metric is # of commodities market tested Predictors Items that can predict success. Sometimes called forecasters, predictor metrics identify items that could help or hinder the achievement of a goal. Oftentimes, organizations do not have any control of predictors. Examples for the savings metric: Exhibit 1 Market pricing of key raw materials Foreign exchange rates Jack Welch is credited with developing a 2 X 2 matrix to evaluate employees by asking did the employee demonstrate the correct behaviors (yes or no) and did they achieve the desired results (yes or no). We apply this matrix to Results and Process Metrics by asking: Did the organization run its processes and achieve the process metrics yes or no? Were the results metrics achieved yes or no? The goal for an organization is to achieve both their process and results metrics. 5

6 A poor performing organization is one that is not achieving results or running the processes to achieve their process metrics. Organizations that achieve results but not process may just be lucky or may have overlooked a metric impacting the result. Organizations that are achieving process metrics but not results need to ensure the correlation between running the processes and achieving the results. Optimal performance is putting the right organization and processes in place and achieving the desired results. Lucky performance is not putting organization and processes in place but achieving the results. Poor performance is not having the organization, processes or the results. OK Acceptable performance is putting the organization and processes in place but falling short of the desired results. Exhibit 2 Delivered Desired Results Yes No OK No Executed Processes Yes 6

7 Choosing the Right Metrics In our experience, following are the Top 5 considerations when choosing metrics for a purchasing organization: 1. Focus on the critical few results metrics, not the trivial many. Follow the adage, If everything is important, nothing is important. One successful client had one or two key metrics for Cost, Quality and Delivery resulting in 3-6 results metrics. Everything else, including # of suppliers, employee training, etc., was considered a process metric to achieve the critical few results. 2. Ensure results metrics are tied to the business. For example: 58% of CEO s surveyed questioned if their purchasing organization is delivering bottom line value. However, according to purchasing leaders, 70% have metrics that are tied to cost reduction, not value enhancement. By including operational impacts and customer givebacks in the equation the metric can become more value focused (refer to exhibit 1). 3. Validate that process metrics have a direct correlation to the results metrics. Manufacturing processes need constant monitoring to ensure quality and productivity, as do the processes used by office staff to impact bottom line value. 4. Keep the metrics simple but do not forgo benefits for the sake of simplicity. For example: While the cost focused metric in exhibit 1 is simpler than the value focused metric, the value metric ties better to the bottom line and helps align functions across the company. These benefits outweigh the increased complexity. 5. Do not forget forecast metrics that can identify potential issues and act as an early warning signal that enables teams to take corrective actions to mitigate impact on the results metrics. Turning Metrics into Objectives The most common method utilized to establish ownership of metrics within a company is through the performance management system. Goals for improving metrics become performance objectives for groups and individuals with linkage to pay and promotion. When developing objectives, we have found that the commonly used SMART format works best: The acronym stands for Specific, Measurable, Achievable, Realistic and Timely. Let s examine each component in detail: Specific indicates an objective is focused and well-defined, usually with action verbs. Measurable provides the yardstick by which the objective s achievement will be tracked. The measures should be readily available and easy to understand. Here are examples with measures applied: -In order to achieve profitability goals for the XX product line, the castings team will reduce current material costs by 3%. -In order to reduce our cost of quality, the Supplier Development Group will improve castings incoming quality by 10% from their current levels, as measured by defects per million. 7

8 Timely or time-bounded indicates the time frame given to achieve the objectives. Without a specific time-frame, objectives are meaningless or confusing. Applying time to our objectives, we progress to: -In order to achieve profitability goals for the XX product line, the castings team will, by 12/31/2017, reduce current material costs by 3%. -In order to reduce our cost of quality, the Supplier Development Group will, by 12/31/2017, improve castings incoming quality by 10% from their 1/1/2016 levels, as measured by defects per million. Achievable and Realistic are the final quality checks to make sure that the specific, measurable and time-bounded objectives can be attained given the resources and skills available. If those responsible for the objectives believe they are not achievable, what resources or skills can be added to achieve feasibility? If the objectives are too effortless, should the improvement goal be raised or the time-frame adjusted? Ownership We have seen organizations use two methods to cascade objectives: Direct cascade of desired results Using this method, a portion of the cost results objective would be assigned to each individual buyer who could deliver savings. So, if the organization was trying to save $15 mil, an individual buyer may have an objective of $1.5 mil. Assigning results to management and process to buyers Using this method, management is responsible for delivering the results and buyers for running the processes that management has chosen to implement (hopefully with their input), on-time and using the processes correctly. During the Center for Automotive Research conference in 2015, Tom Finelli from Fiat Chrysler, Steve Keifer from GM, and Robert Young from Toyota talked about buyer cost reduction objectives. All three indicated they were getting rid of them. They indicated that the primary drive was to improve their supplier relationships. All three OEMs want their buyers to work collaboratively with their supply base to achieve product goals. They want their buyers to have a cross-functional structure and process to improve supplier relationships. Collaboration is key. APD conducted a survey with more than 30 automotive suppliers about the cost processes used by their customers. One of the results focused on the high inconsistency in the use of the same cost methods by the buyers within the same company. This inconsistency leads to supplier distrust in the processes and trustworthiness of their customers. Removing the cost objective from the buyers objectives enables management to focus their discussions with the buyers on how they are implementing the processes and the effectiveness of the processes. 8

9 Our recommendation is that management own metrics and objectives associated with the delivery of results and the development and implementation of processes. Buyers would then have objectives tied to running the processes on an accurate and timely basis. NOT RECOMMENDED: RECOMMENDED: Metrics Management The two most impactful ways of managing to improve metrics is through the performance management process and through meetings. Once the metric driven objectives are developed for individuals, the performance management processes will be a major driver in the success or failure in the achievement of desired results. To be effective, the process needs to include: Frequent feedback performance feedback should come as a part of the formal performance management process and day to day as managers observe activity. Feedback needs to occur more frequently for new employees and employees that recently changed positions. Recognition - provide appropriate feedback/rewards for high performers Coaching and counseling provide appropriate feedback/improvement incentives for poor performers Weeding the garden finally, if individual performance is not improving despite coaching and counseling, decisions need to be made on the on the suitability of the individual and their fit within the company In our experience, purchasing groups do not spend enough time managing metrics in meetings. This is not to say they spend too little time in meetings, just that many meetings are not metric focused. Metrics focused meetings: Involve cross functional groups that have impacts on the metrics Review the current metric status Discuss what is working and not working Assign specific actions tied to the metrics 9

10 Summary and Conclusions How purchasing metrics are developed and deployed have a direct correlation to the results the organization is working to achieve. We correlated 120 purchasing organizational dimensions against cost control performance and found that the following items had the highest correlation to good performance: Well defined key metrics Accurate and timely tracking of status against key metrics Clearly defined roles and responsibilities Clearly defined performance objectives for all individuals in the organization Ongoing employee performance management All 5 of these dimensions can be improved by working to develop and implement key metrics that are: Strategic Tied to the CEO s vision and strategy Aligned Improve alignment within the company and within the supply base Comprehensive In addition to results metrics process and forecast metrics are also defined Owned Clear ownership exists for the metrics Managed There is a clear method for managing and reporting status of the metrics 10

11 Make Purchasing A Competitive Advantage You already have a road map to accelerate cost reductions, improve supplier relations, and mitigate supply chain risks. We help fill in the gaps. Our clients engage us when they want to elevate the role of purchasing and achieve gains faster. At APD, we partner with purchasing executives to build tailored and scalable solutions that help them make purchasing a competitive advantage. People Technology Execution Enhancing the capabilities of your purchasing team Unlocking savings with big data analytics for purchasing Implementing projects that improve the bottom line Purchasing Placement (direct hire or contract) Buyer skill development training: Strategic negotiations Commodity leadership Understanding and managing costs E-sourcing tool simplifies quoting and supplier management Develops should-be cost models for side-by-side quote comparison Track open work items and cost status by plant, buyer, supplier, and Bill of Materials Savings roadmaps with specific cost savings actions for each commodity Should-be cost model development Strategic sourcing implementations for sustainable savings Customized solutions; There is no one size fits all approach. About the Author Jeoff Burris is the Founder and Principal of Advanced Purchasing Dynamics (APD), a leading provider of purchasing services and software to the manufacturing industry. Burris has thirty years of specialized experience in the automotive industry working globally for companies such as Ford, Magna and Simpson Industries across a diversity of roles from Buyer to Chief Procurement Officer. He is a purchasing expert who possesses the knowledge and experience necessary to transform underperforming purchasing organizations into world-class leaders. Burris founded APD in 2004, and today helps clients make their investment in their purchasing capabilities a competitive advantage. He is a recognized industry leader, and frequently speaks to executives at industry events on the role of Purchasing, and how companies can maximize their purchasing ROI. Phone: contact@apurchasingd.com 11

12 ADVANCED PURCHASING DYNAMICS 484 Deer Street, Plymouth, MI, Copyright (C) Advanced Purchasing Dynamics, Inc.