Procurement 101Keep Your Eyes on What You Buy: Part 3 – Measuring Efficiency
As we discussed in our last post, there are four key factors that should be kept in mind when negotiating for products or services in order to make the process more efficient and effective: quality, price, delivery, and payment (as well as a willingness to consider each of these factors in your decision-making process).
But how do you know that you’re more efficient and effective in negotiations, or the management of the procurement process? In this post, we’ll address a number of the things that factor into measuring results — and what to look for in order to ensure your processes (and your suppliers) are effective.
When measuring the efficiency of supplier negotiations, there are a number of key things to keep in mind. The first is ongoing supplier evaluation. An objective and constant system of measurement must be created in order to be able to evaluate any and all suppliers equally. For relatively simple procurement processes, this may mean something as simple as, did they:
- Deliver the quality of product that was promised?
- Meet price expectations and charge what was agreed upon?
- Deliver on-time and when needed?
- Did they accommodate your payment preferences?
For others, this could mean establishing a set of KPIs (key performance indicators). These indicators (or set standards) allow you to measure the performance of the purchasing process and set a target for each of the influential factors that you have identified as important, and establishes a standard for regular comparison against your target.
ome criteria to consider when you’re establishing KPIs in each of the key factors (quality, price, delivery and payment), could be:
- A list of quality specifications for each product that describes expectations and requirements when purchasing this particular product or service
- Target cost
- Acceptable margins of increase or decrease over historical pricing
- Future expectations
- Is the product/service available when it is needed?
- Are inventory levels maintained at an acceptable (not too high – overstock – and not too low)?
- Have supplier financing options been utilized in the most effective way?
The key criteria for measurement in each of these categories may vary widely depending on the type of business you are in, what products you order, and how your organization defines success. Regardless of what you’re measuring, it’s important to keep in mind that successful tracking of results and ensuring effectiveness of your process requires evaluation on an ongoing basis, as well as a simple mechanism of doing so. Your procurement team should be evaluating suppliers as each orders close, answering or reporting on simple, straightforward questions. This allows you to know as soon as you need to that suppliers are not performing well, with the opportunity to take corrective action before their performance has a direct impact on your business.
This is the third in our series of posts about keeping your eyes on what you buy. Next, we’ll talk about how to address the efficiency issue when you recognize that improvement is required. You can also read our previous post in this series: Art of Negotiation.
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