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Procurement Metrics

An Introduction to Sourcing Business Intelligence (Part 2): The Leap from Sourcing Analytics to Supply Intelligence [PRO]

data analytics

In Part 1 of this Spend Matters PRO research series, we defined and explored the concept of sourcing business intelligence (BI), an emerging focus area for an increasing number of procurement organizations. Sourcing BI is not a “tool” like a spend analysis application module or a general purpose BI tool — like the visualization tools Qlik, Tableau or Sisense. Rather it is an enabling approach to sourcing, supplier management, total cost modeling/should cost analysis and related initiatives like clean sheeting that focus on the ability to incorporate increasingly rich external market, commodity, category and supplier intelligence with existing internal data sets, process flows and activities to enhance savings, compliance and organizational resilience.

Much of this activity is occurring within category management where managers are trying to move from historical descriptive analytics to “outside-in” predictive/prescriptive analytics that yield true intelligence rather than just subscribing to tribal best-practices sharing and generic data-as-a-service (DaaS) offerings in the marketplace.

In Part 2 of exploring sourcing business intelligence, we first will set some context about how to make the leap from sourcing analytics to broader supply intelligence. “Supply management” is bigger than “sourcing management” — and similarly — “intelligence” is bigger than “analytics.” By understanding this evolution, it helps us set up a deeper discussion into how artificial intelligence relates to analytics — with an immediate focus on sourcing, but a longer-term focus on broader spend/supply.

Are Your Procurement KPIs Balanced or Obsolete? [Plus +]

As our Spend Matters Plus analysis of procurement key performance indicators (KPIs) continues, we will turn our attention to additional metrics by which you can measure procurement performance including supply base development and spend under management. We will also examine how to discover if organizational procurement KPIs are off balance, favoring one area over another or the strategic over the tactical, or if they’re just right.

This analysis builds on a prior chapter of this research brief that provides an introduction to procurement KPIs. While intended for everyone in procurement from buyers to chief procurement officers, this series is particularly suited for individuals and organizations looking to put in place the right measurement foundation to change how procurement is viewed by the business from a function that only reduces input prices and “keeps the production line running,” to one that brings new areas of value, from supply chain risk reduction to creativity and innovation.

Foundational Procurement KPIs Every CPO, Supply Manager and Buyer Needs To Know [Plus +]

This research brief is intended as an aspirational piece for more transactional-focused procurement team members who are aiming to add value to procurement and the business beyond mere efficiency improvements and price reduction efforts. It is not a compendium of financial metrics to convince your CFO about the value of procurement – you have to develop your business case tied to your needs and strategy for that. (Though, do reach out to us because we’ve done quite a bit of research in this area as well if you’re interested.) Rather, it is our hope that this series will leave you with a laundry list of prioritized ideas and open your mind to the qualitative side of the business – and the ways in which you can begin to measure procurement contribution and key performance indicators (KPIs) to quantify the return of the various activities you’re up to.

In the first installment of our introduction to KPIs and related considerations, we will examine why KPIs matter and how to use them and discuss basic procurement metrics, the role of innovation in setting measurement variables and how certain KPI approaches can mislead.

Why Purchase Price Variance (PPV) Should Be Banished From Procurement Measurements and KPIs [Plus +]

One of the biggest challenges to overall program impact and improvement in all but the most advanced procurement organizations are the raw elements that many procurement organizations measure themselves against: key performance indicators (KPIs). Of these, purchase price variance (PPV) is particularly obnoxious in all but certain cases. PPV measures the difference in price paid for multiple purchases for the same SKU, part or service. It is typically employed in standard costing environment in an ERP system for SKU-based items where actual PO prices are tracked compared to the existing standard cost.

This methodology is great for the financial accounting function. The PPV can be calculated easily by the system by accumulating the PPV until the new standard is calculated (and those variances posted to the appropriate general ledger account). A favorable PPV (i.e., price is less than the standard) is also known as a purchase price reduction (PPR). This all seems straightforward for the accounting department, but it’s not a great way to judge procurement performance, at least not on its own. Why?

There are numerous reasons why PPV can be such a misleading figure. In this two-part Spend Matters Plus series, we explain why PPV is a KPI that procurement organizations should stop measuring internal and individual performance against.

Navigating The Path From Tactical Procurement Analytics to Strategic Supply Analytics [Plus +]

spend visiblity

Spend visibility is foundational to any procurement transformation because to better manage supply, you have to manage spend. Spend is what you pay and supply is what you get, and to manage spend you have to see it. Yet too many procurement organizations work hard to put basic spend analytics in place but don't have a broader vision, strategy and roadmap for strategic supply analytics (i.e., the analytic capabilities to support strategic supply management). We use the term “supply analytics” instead of “procurement analytics” to reflect procurement’s increasing role in managing broader supply outcomes than just its own performance – especially in direct procurement. This Spend Matters PRO article is designed to provide you such a roadmap. It is not a step-by-step, one-size-fits-all approach because every firm will have a different experience. It is, however, a map that can guide you through plotting out your supply analytics journey.

Procurement Metrics: Understanding the Economic Language of Value (Part 2) — Expenditures, Expenses and Financial Reporting (CapEx, COGS and G&A) [Plus +]

finance

In the first installment of this series, we discussed the term “spend” (the noun, not verb), in the context of supplier spending, in a fair amount of detail. We discussed addressable spend, and what's included and excluded for the purposes of spend visibility/management, but also for the purposes of using spend within procurement performance measurement and benchmarking. In this installment, we dive a little deeper in terms of comparing and contrasting spend to other terms, as mentioned in the title.

Procurement Metrics: Understanding the Economic Language of Value (Part 1) — Spend [Plus +]

buzzwords

One of the challenges that procurement faces is "speaking the same language" as finance, as well as the language of its stakeholders. A marketing department, for example, may use the term “investment” for its spending. Similarly, many procurement organizations categorize some of their added value in a category called “cost avoidance,” even though the term is not taught or recognized formally by the finance function.

Even within procurement, many terms are used inconsistently. Consider the term “addressable spend.” Is all spend addressable, as represented by cash disbursements going to external parties? Or is it supplier spending that is reasonably under the influence of procurement? If you say the latter, what defines “reasonable”?

The friction and misalignment common between various functions often results from stakeholders not having a basic understanding of terms that seem similar but yet can be very different. This problem is exacerbated when the stakes are high and you start getting measured and benchmarked on these metrics. To prevent this, procurement needs to be “business multilingual” and understand the variations of terminology so that it can best speak these languages and help the organization make the best decisions to create value.

This is what we’ll address in this analysis, with a focus on procurement and finance within the enterprise. Clearly defined terminology is the foundation from which higher-level concepts, performance metrics and benchmarks can be consistently understood — and improved.

How to Justify Spend Analysis to Finance/IT When There’s No Clear ROI (Part 1) [Plus +]

finance

Analytics are all the rage. And spend analysis is Procurement 101. So, getting some reasonable investment shouldn't be a problem, right? Wrong. The problem with analytics is that the identified value is all “option value.” You don't know how much value opportunity you will uncover with the analytics until you actually perform them (and implement the identified opportunities)! This article is designed to help you overcome this catch-22. We've prepared 10 strategies to help you get the ball rolling with IT and finance (even if the ROI isn't clear).

A 21-Question Health Check to Score Your Procurement Scorecard (Part 3) [Plus +]

As the old business adage goes, “what gets measured gets done.” This is certainly true in procurement. If you want to do the right things for yourself and your stakeholders, you need to measure the right things and do it efficiently. You also need to ensure that you are measuring what your stakeholders want and what you are in fact delivering. It’s a foundational competency. In fact, in the most recent Hackett Group procurement key issues study, “value contribution visibility” ranked third in terms of procurement key capabilities that were viewed to be major or critical. This is the last post in a three-part series providing a 21-question “health check” for your procurement scorecard, this time covering questions 16-21.

A 21-Question Health Check to Score Your Procurement Scorecard (Part 2) [Plus +]

health

As the old business adage goes, “what gets measured gets done.” This is certainly true in procurement. If you want to do the right things for yourself and your stakeholders, you need to measure the right things and do it efficiently. You also need to ensure that you are measuring what your stakeholders want and what you are in fact delivering. It’s a foundational competency. In fact, in the most recent Hackett Group procurement key issues study, “value contribution visibility” ranked third in terms of procurement key capabilities that were viewed to be major or critical. This is the second in a three-part series providing a 21-question “health check” for your procurement scorecard, this time covering questions 6-15.

A 21-Question Health Check to Score Your Procurement Scorecard (Part 1) [Plus +]

supplier scorecard

As the old business adage goes, “what gets measured gets done.” This is certainly true in procurement. If you want to do the right things for yourself and your stakeholders, you need to measure the right things and do it efficiently. You also need to ensure that you are measuring what your stakeholders want and what you are in fact delivering. It’s a foundational competency. For example, in a past Hackett Group procurement key issues study, “value contribution visibility” ranked third (after sourcing and category management) in terms of procurement key capabilities that were viewed to be major or critical, with 76% of firms having picked this. It even outperformed “SRM programs,” which got the fourth slot. In other words, the competency for value contribution measurement was higher than an area of actual value creation! (In the 2017 version of this report, "measuring value beyond savings" is a big part of Priority #1 — improving the stakeholder experience.) In this research brief, I’ll discuss how you can assess the quality of your procurement scorecard and how to improve it. To do so, I’ll assume that you have some type of procurement scorecard already, and that maybe you’ve even already adopted some smart principles to it. But, I’m going to go deep on this one and ask you a set of 21 questions about your scorecard. This first installment covers the first five.

Top 10 Ways to Radically Expand Category Management Value Creation [Plus +]

category management

In the never-ending quest to deliver more value, procurement organizations are trying to squeeze more savings and innovation out of spend categories. But, eventually the well starts to run dry, and when that happens, you need to either get more out of that well (fracking for spend savings, perhaps?), dig a deeper well, find another place to dig, or find another way to get the water.

My point? To improve category management, which we sometimes affectionately refer to as CatMan, you sometimes have to expand it or blow it up completely. Here are some ideas that I’ve seen work elsewhere that can hopefully give you some inspiration and raise your category management game.