Measuring Purchasing Performance
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The old saying is that you can’t manage what you don’t know. Performance Indicators for any business are critical in evaluating success and highlighting key issues, that need addressing, within the company.
One of the major problems is that there are so many things to measure, indeed you can argue that in supply chain they are virtually limitless. The key trick is ensuring that what you measure is a key determinant in the success of your business (and preferably directly linked to your business strategy and targets). This can take time to both decide upon and also to gather meaningful data.
Once you’ve have agreed upon your measures you can distil this even further to a RAG – Red Amber Green traffic light report system or reporting dashboard to ensure that you measure by exception, focus on what’s going wrong in the business and how you can address it.
The Role of QCD in supply chain
QCD stands for Quality Cost and Delivery and represents the holy trinity of measures. QCD, common in manufacturing, can not only help improve things internally but improving the results of these measures can also influence customer satisfaction.
Quality
Quality is often measured in terms of rejected goods or defects – for example if a supplier delivered 100 items on time in the month then great! But if the quality was poor and only 20 of them were usable then not so great. Many organizations will choose to employ a DPPM score (Defective Parts per Million) or simply calculate quality as a percentage of overall deliveries as a not right first time (NRFT) ratio.
Cost
Cost can be measured in a variety of ways from the cost of the part i.e. monitoring the cost trend of a given commodity over time through to measuring productivity and transactional costs. It’s often argued that productivity is a difficult nut to crack as the actual time taken to raise a purchase order might be minimal compared to the time taken to source the supplier or provide key technical information. However it’s worth persevering as understanding your transactional cost can drive key changes in your processes and organization behaviour.
Delivery
Delivery Schedule Adherence (DSA) is one of the most common supply chain metrics. It specifically measures “did the item you ordered get delivered on the day/time it was supposed to be delivered on in exactly the right quantity”. Some organizations accept a tolerance threshold – for example seven days early or seven days late. For other organizations (and automotive is a good example here) it can be measured at a more granular level.
DSA can have a direct impact on customer satisfaction as where suppliers deliver late – this can impact the manufacturing process which in turn can affect when the items can be shipped.
Does it matter which people from your organization chase parts from suppliers?
During the purchasing process one of the common tasks to be completed is the delivery schedule – typically this will be outlined during the quotation phase and confirmed at time of order placement. This is usually in the form of an agreed lead time – i.e. 3 weeks – or a specified date/time.
The expediting process refers to the procurement organization contacting the supplier for either updates on the delivery schedule or to reassess the schedule based on issues with the supply of parts.
The challenge for this process and one which is a common issue is who actually chases the supplier. In many cases this will typically be the buyer that raises the order – they may have a regular process where they reconfirm the order book or a specific order.
Where there are many stakeholders relying on delivery – in a manufacturing organization for example – there may be a temptation for everyone to get involved in this process where the part becomes critical – or is late enough to hold up production.
Where problems occur with delivery a supplier could find themselves hastened multiple times from buyers up to management. This does cause some issues – take for example a supplier that is supplying multiple products to different manufacturing cells and they are experiencing production problems impacting delivery– where they are expedited from different sources they are unable to prioritize which can result in further issues and delays and more frustration.
In many cases the buyer is divorced from the manufacturing line and therefore doesn’t have sufficient information to prioritize – this requires a formal communication method to mitigate the problem which the buyer must adhere to before agreeing to a revised delivery schedule.
Where problems continue and poor performance becomes an issue with a supplier then a suitable member of the management team should become involved (often the procurement functional lead). Ensuring this is adhered to can also alert management to the need to kick off formal supplier improvement initiatives.
Formal relationships between suppliers and buyers should be established to minimize the points of contacts – it’s understandable for dis-satisfied stakeholders to want to get involved but generally they may not be armed with all the information and skills to make the right decision.
Finally – ensure your organization has a policy/procedure for supplier escalation – ensure that it lays out when, how and who will be involved in the process and share this information with the supplier. Where suppliers do not achieve 100% on time delivery – expediting or rescheduling becomes a necessary evil – however a common sense approach can ensure that a bad situation doesn’t become worse!