Strategic Performance Metrics for Purchasing and the Supply Chain

By Dr. Tom DePaoli

“Unless you have clear goals you are a nomad, not an explorer.”

Many purchasing organizations struggle with the appropriate metrics to use. They often neglect strategic metrics and favor more tactical and transactional ones. This type of approach just encourages a stereotypical view of purchasing that is traditional and bureaucratic. Emphasizing strategic metrics encourages a different image of purchasing and, more important, strategic-like behaviors by purchasing professionals.

One key strategic metric is the number of supplier alliances. These should be not many, and ideally be limited to suppliers that have a key impact (significant dollar spend percent) on your total cost of goods sold. Often 20% or fewer of your suppliers account for 80% of the spend. The emphasis should be on suppliers that can differentiate you or give you a distinct competitive advantage. Characteristics of such alliances should include long-term evergreen contracts, participation in new-product design sessions, joint process improvement efforts, exchanges of executives, direct electronic links and cycle-lead time reduction.

Another measurement should be the number and percentage of suppliers that are certified: ISO 9001, ISO 14001 etc. These are not guarantees that a supplier is perfect, but they do indicate that they are pursuing excellence and at least have an understanding of their processes and how they perform their work. This is a significant first step in any joint supply chain process improvement effort. If the supplier is dedicated to its own program of process improvement via Lean or Lean Six Sigma, joint cooperative ventures are more likely.

Besides purchasing having its own mission and vision statement that aligns with the corporate plan, leading-edge purchasing departments should have their own five-year strategic purchasing plan. Elements of this plan should include all future initiatives, projects, metrics, goals and resources needed.

A noteworthy area to include in the plan is professional development. Purchasing team members should be encouraged to get professional certification, become industry, not just materials experts, and improve their overall knowledge of the business. The most vital area, that is often neglected, is getting more knowledge of what is critical to the paying customer of your product or service. Purchasing professionals should have close ties with sales, marketing, marketing research and shadow them on customer calls.

Another strategic measure is to have a sourcing methodology and to constantly update it based on market and global conditions. A critical aspect of this methodology should be sourcing with cross-functional teams, use of the Porter five forces model when appropriate, and high visibility along with transparency during the selection.

Ideally these strategic metrics should be put on a corporate dashboard to be seen by all employees. Strategic metrics should also be the catalyst for developing a balanced scorecard for purchasing. Unfortunately purchasing often neglects strategic metrics and focuses of fire-fighting and tactical metrics. Strategy always trumps tactics and strategic metrics need to become a valued tool for all purchasing organizations.