KPIs Are Like Miniskirts — They Hide a lot More than They Reveal

gep-logo150x45We are delighted to feature a guest post from Teja Kappagantula of GEP, a leading global provider of consulting, outsourcing and technology solutions to procurement and supply chain organisations. You can visit GEP's  Knowledge Bank for additional interesting thinking on procurement.

In this era of Big Data, there is no dearth of data and information available to us procurement professionals. With the ever-increasing emphasis on data-driven decision making, it is very easy to boil down every decision into a series of logical conclusions based on the data analysis. Procurement professionals are challenged to demonstrate value beyond cost savings, now more than ever. It is natural that we resort to metrics, i.e. KPIs, to demonstrate the value.

But do procurement KPIs serve the purpose of measuring and demonstrating procurement value beyond savings? Expert opinions on this topic range from data is everything to lies, damned lies and statistics. The answer to the above question is probably somewhere inbetween these two extremes.

Know what you can measure

It is essential to understand the organisation’s data capabilities before defining the metrics to be measured. For obvious reasons, a procurement organisation that does not have a centralised view of its external spend can in no way measure metrics such as spend under procurement, maverick spend, spend managed per FTE. Similarly, an organisation that does not have resources to track the external market indices that impact spend should not set out to segregate procurement savings vs. market adjustment savings.

Know when you can measure

Being able to measure and track anything in real time is everyone’s dream; but not every metric needs to be measured frequently. While it is a great idea to track the savings on raw materials with significant exposure to feedstock prices every week, it is a futile effort to achieve this level of granularity on most of the indirect spend.

Know what you need to measure

There were instances in the past where the procurement organisation was using the Days Payable Outstanding (DPO) as a metric to demonstrate the value it contributed. A large number of organisations today measure the average payment terms (APT). What both these approaches miss is the extent to which they drive the procurement decision making in the wrong direction. Some of the larger organisations these days do not seem to realise the bull-whip effect that their extended payment terms have on the upstream players. A better reflection of procurement’s value to working capital management is probably the interest saved through payment terms. Or even better, the cash conversion cycle of the organisation. Similarly, a low-maturity procurement organisation should ideally focus on measuring and tracking cost savings and not worry a lot about metrics such as procurement ROI, PO automation rate, etc.

Know that numbers don’t tell the true story

Like Mark Twain said, numbers always do not tell the true story. A really long APT number may be arrived at, at the cost of frequent interest-linked price adjustments. A very high PO automation rate may be masking the terrible service levels for the manual PR-to-PO transactions. It is essential to always interpret and add commentary to the numbers so that the numbers tell a true story.

KPI Best Practices:

  • Five to six strong KPIs that take a balanced scorecard approach are sufficient to track and measure procurement’s performance.
  • Tracking and measurement methodologies and the KPIs themselves need to be revisited once in every three years (if the revisions are too frequent, you will not be able to see the year-on-year changes).
  • Invest in continuously improving the accuracy and availability of relevant data.
  • Focus on trends more than the absolute numbers.

 

 

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