How Procurement Performance Targets REALLY Get Set – And What to Do About It (Part 1)
Categories: Perspective, Procurement Commentary, Procurement Strategy & Planning | Tags: L2, Process & Best Practice
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I always enjoy the presentations from Chief Procurement Officers and other procurement leaders who invariably have good parting recommendations like:
- “Self-fund your way to success”
- “It’s all about the people – get the best team”
- “Ensure senior management commitment,” and
- “Use Stretch Goals – They Work!”
- This last one is my favorite. The higher you go in the organization, the better it is received. In other words it is better to be the stretcher than the stretchee. Which brings me to the topic of setting procurement goals.
In the perfect world, the enterprise performs good Enterprise Performance Management (EPM) processes by forming a great strategy and then deploying it (e.g., ‘hoshin planning’ planning technique) to cascade enterprise strategic goals down to line staff in a way such that the scorecards are balanced, relevant, aligned, realistic, etc. (i.e., think SMART principles). Of course, in the real world, for Procurement, the process usually involves something much less complicated: CFO takes last year’s actual savings and then tacks on another 10-20 percent. Chaos then ensues as that stretch goal then gets parsed out to the team in a similar “no good savings deed goes unpunished” vein. It reminds me of the “and THAT is how $#it happens” parable as can be seen here.
But, I thought I’d customize it to Procurement, and in particular, to a manufacturing firm…
In the beginning was the Strategic Plan from the strategic planning group (with the help of the consulting firm MckBoozbainCG LLC) that focused on global, profitable, sustainable innovation-based growth.
- And the Plan was without form and the supply market assumptions were void:
- And the darkness was upon the face of the Head of Supply Chain who then spake unto the CPO saying: "We must create a resilient and global supply chain, that is also operationally excellent.”
- And the CFO also spake unto the CPO and increased the hard cost savings goals from the previous year whilst reducing the procurement budget by 5 percent
- And the CPO went to his head of sourcing and category management and said “It is a crock of excrement, and none may abide the odor thereof, but we need favorable PPV (direct) and budget reductions (indirect) – so get me a plan.”
- And the head of direct and indirect sourcing went to the category managers and said "It is a container of excrement, and it is very strong, such that none may abide before it, and since the opportunity assessment report from the consulting firm, based on their analysis of our A/P data, says that we should be able to hit these targets, we don’t have much choice.”
- And the category managers spoke to the sourcing managers and buyers and said "It is a vessel of fertilizer, and none may abide its strength, so do your best and let’s go out to the supply base again for another round of blood letting.”
- And the buyers went to the suppliers and with a well-crafted message regarding the strategic plan and that "It promoteth growth, and it is very powerful, and thusly requires strategic collaboration to promote sustainable innovative global growth, while ensuring operational excellence and cost discipline. And to kick off our future collaboration, you have been invited to a competitive bidding event being held next week. Details will be forthcoming soon via our e-sourcing system and supplier portal.”
- And the Sales executive from the supplier went to its senior management and with a sigh and an eye roll said "Our customer says this new powerful plan will promote the growth of both our companies.”
- And the Chairman of the Board and Chief Executive Officer for the supplier saw the Plan, and saw that it was good.... for the buyer… and then ordered full-scale countermeasures to prepare for battle in negotiations.
- …And THAT is how procurement savings targets happen!