l4 03 Measuring Purchasing Performance

Measuring purchasing
performance
Session 1
Introduction to performance management
in purchasing and supply
Adding value to the business
Learning objectives
At the end of this session candidates will be
able to:
state the principles of performance
management in corporate business
operations
explain how performance management is
undertaken within purchasing and supply
operations
explain how costs are identified and built up
in business processes from acquisition of
goods & services, added value, to final
delivery to customers
give examples of how performance
measures are used as part of the wider
principle of continuous improvement in
business
assess how performance management is
linked to the need for 'continuity of supply' in
a business operation.
Learning objectives (contd

demonstrate the importance of effective
supply chain performance management
within the management of a successful
operation.
state the principle of 'Added value' with
respect to the role of purchasing and
supply in a business operation and
describe how this can be measured
give examples of added value
opportunities which Purchasing and
Supply Managers can offer to a business.
assess the 'Added value' opportunities
afforded by improved performance in
purchasing and supply and describe how
this can be measured
Learning objectives (contd)

afforded by reducing inventory costs and
administration and the use of consignment
stocks in purchasing and supply and
describe how this can be measured
afforded by Purchasing and Supply
Managers negotiating improved
procurement and contract terms with
suppliers and describe how this can be
measured
afforded by improving operational
efficiency in purchasing and supply and
describe how this can be measured.
Purchasing Performance Management within the Organisation

Identify the
Procurement
strategic
targets
Corporate
Mission
statement &
strategy
Feedback loop
Procurement
team/
management
challenge
Plan the
methodology/
outcome
targets
Map the
process
elements
Implement
the
Procurement
performance
plan
Decide on roles
&
responsibilities
8a
ACTION BOXES
The performance of the
Purchasing & Supply
function
8
Improve each
management
process
The performance of
Suppliers
8b
8c
Deliver
demanding
performance
targets
The performance of
the Buyers
10
11
Manage
continuous
improvement
Manage &
communicate
results
Diagram from
workbook by
Bryan Jones and
John Oliver
Performance measures (KPIs)

Strategic long-term senior management
objectives and targets
Tactical medium-term
executive/supervisory management
performance issues
Operational short-term
process/transactional and issues.
Supply chain
Inbound supply
Intra-site management
Outbound delivery
How should purchasing performance be
measured in each of the above?
Cost analysis
Product
Cost
Percentage
Labour
45
45%
Materials
30
30%
Overheads/
profit
25
25%
Selling price
100
100%
Office chair
Continuous improvement
A process of improving an organisations
or suppliers performance over a given
period of time with agreed areas or criteria
requiring improvement (CIPS)
Continuous improvement is everyones
responsibility, so Purchasing work with
supply partners, organisational teams and
individuals and customers to improve
performance
What recent continuous improvement
gains are you aware that Purchasing have
achieved in the supply chain in your
organisation?
Continuity of supply
Minimise the
vulnerability in supply
markets
Verified purchasing
performance indicators
Purchasing practice,
innovation & product
research
cost & service
Purchasing
core tasks
Ensuring supply
continuity to the
organisation
Purchasing represents
the organisation as an
attractive trading
partner
Purchasing :the key tasks within a business /organisation
Diagram from workbook by Bryan Jones and John Oliver
Supply continuity
Must be achieved in a cost effective way,
in line with organisational financial
requirements
Performance measures depend on what
Purchasing want to achieve but may
include outputs such as acquisition costs,
delivery service, and production downtime
due to no supplies.
Performance improvement
Categories include:

Cost reduction
Service improvement
Reduced stock-holding
Improved supplier base management
Improved communications
Within your organisation, what

performance issues do Purchasing most
want to improve?
Value chain (Porter)

(Diagram from workbook by Ian Thompson)
Primary Activities:
Inbound Operations Outbound Marketing

Logistics
Logistics & Sales
Margin
Procurement
Secondary
Activities:
Technology development
Human resource management
Firm infrastructure
Margin
Adding value
Same goods and services for less cost
Additional service benefits for same cost
Reduced cost and additional service
benefits
How has purchasing recently added value
in your organisation?
How are purchasing professionals
motivated to add value in your
organisation?
The Purchasing Process and its stakeholders

(Manufacturing environment)
Research and
Development
The Purchasing
team
Finance
Customers
Quality
Inventory
Management
Human
Resources
Suppliers
Production
Warehousing
And
Distribution
Information
Technology
Maintenance
Sales and
Marketing
Diagram from workbook by Mike Fogg

NB: The hierarchical sequence of the business functions in this chart is not meant to give prominence to one
function over another, it is simply a convenient way of grouping stakeholders together in this environement
Maximising added value opportunities

demands effective communication and flow of
information across the supply chain, with all
parties engaging positively to identify
continuous improvement
Costs of stock
Cost of stock-holding (on cost) =
acquisition+storage+staff+management/
handling
Opportunity cost is related to what you
could do with the cash invested in stockholding
Purchasing add value by contributing to
reduced stock-holding costs in many
ways, such as JIT delivery, and other
improved terms and conditions.
Total cost of ownership

Total cost of ownership (TCO) =
purchase price + COA + cost of operation +
cost of disposal
What are the opportunities for purchasing to
make savings, in this equation, through
improved contractual terms and
conditions with suppliers?
Operational efficiencies
Measures would be:
salaries of buying team and purchasing staff
premises and facilities costs
systems (ERP) and process costs
what opportunities might there be in your
organisation for purchasing to add value
through improved efficiencies?
performance
Session 2
Categories of performance measurement
Cost and price measures
Learning objectives
able to:
describe how purchasing and supply
expertise can contribute to KPIs for a
corporate business team
list the main categories of key performance
indicators (KPIs) within a purchasing and
supply management operational department
define the most appropriate KPIs which will
make a contribution to profitability with
respect to cost savings, services and
inventory management
respect to basic workload control within a
purchasing operation

respect to purchasing infrastructure and
organisation
define which purchasing and supply
competencies are required to contribute
effectively to profitability
describe the market forces that determine a
price within a market
define, in cost accountancy terms, the main
elements in building up the costs of a
product or service
Learning objectives (contd

analyse the cost information provided for a
given product into the main percentages
and illustrate this in a graphic format
undertake an example of a detailed cost
breakdown as part of a negotiation with a
supplier, claiming a price increase due to
an annual increase in labour costs
give examples of cost elements which are
not subject to increase over time for a
given product
summarise how overheads are treated in
the build-up of the costs of goods and
services.
Purchasing within a
Corporate Business Planning &
Management structure
The Corporate Business Plan
Marketing Plan
Finance Plan
Purchasing
Purchasing
People Plan
Production Plan
SupplyChain
ChainPlan
Plan
Supply
Stores, Stock
StockHandling,
Handling, WIP,
WIP, Transport
Transport&&Distribution
Distribution
Stores,
ManagingPurchasing
Purchasing
Managing
KPIsand
andTargets
Targets
KPIs
Fig 3.1 Business Planning : The Purchasing Link
Diagram from workbook by Bryan Jones
Performance measures (KPIs) 6

point plan

Reliable
Meaningful
Focused
Fair and balanced
Capable of change and improvement
Manage and measure the target.
Smart targets
Specific easily understood
Measurable what does success look like
or how is it quantified?
Achievable otherwise de-motivational
Relevant to core business/service
Timed realistic timescale
Targets should be reviewed regularly to
ensure they are still relevant and
achievable
Generating KPIs
Consider:
what is to be measured (strategic,
operational or tactical)
link to purchasing business plan
compliance with 6 point plan
available data source
valid means of measurement
write target
communicate to relevant others
what is the difference between KPIs in
public and private sectors?
Cost savings
On sales turnover of 150,00, where cost of
sale is 100,000, what is the effect on profit if
the buyer makes a 2% cost saving on
materials?
Labour
45,000
45%
Materials
30,000
30%
Overheads
25,000
25%
Totals
100,000
100%
Process flow
Efficiency and
effectiveness in process flow
Fig 3.4 The Purchasing Process Links
Each link is reviewed
and assessed in order tocurrent
develop
can be evaluated
by comparing
the full strength of the whole chain
achievement with industry or professional best
practice.
Purchasing
PurchasingPolicy
Policy
and
Ethics
and Ethics
TheFive
FiveRs
Rs
The
The
ThePurchasing
Purchasing
Buying
ininBuying
Cycle
Cycle
EvaluatingSuppliers
Suppliers
Evaluating
The
Offers
Offers
Purchasing
/
Price
Analysis
/ Price Analysis
process
Purchasing role in
the Organisation
Data & Information flow

Purchasing Partnerships
Supplier
Supplier
Relationships
Relationships
Continuous Improvement
Value for Money
Purchasing Partners
Customer Partners
SCP 2005
Diagram from workbook by Bryan Jones
Process flow
Best practice considerations:
does purchasing have a clear role that is
readily understood?
does the buyer have clear guidelines for
working within the purchasing process?
are purchasing basics such as the five
rights understood and adhered to?
is the IT system meeting our needs?
how effectively do we manage internal and
external customers?
Organisation infrastructure
Within an organisation purchasing may be
organised in many different ways:

centralised or de-centralised
Centre Led Action Networks (CLAN)
category purchasing
consortium purchasing
co-operative purchasing
How purchasing fits and works with other

functions of the organisation and how it
impacts on its ability to make savings and
add value.
Purchasing competency
These are the skills, abilities and
behaviours required to do the job and for
any position include:

knowledge, skills and attitude

experience
qualifications
targets to be met
what are the competencies that you need

to do your job?
how are they measured?
Cost and price

Cost - total sum involved, including price,
plus any additions that may be associated
with ownership and use (CIPS)
Cost is not, and should not be used as, a
synonym for PRICE or VALUE
Price the sum for which the product or
service can be sold in the market.
Cost and price

Buyers need to research the market and
available suppliers to identify what is the
best price
In many cases it is important to
understand how that price has been
arrived at, if the buyer is anticipating a
longer term relationship
Buyers need to be aware of cost-price
movements in their market
Measuring purchasing performance on
price is a complex issue.
Costs
Fixed costs do not vary with output (rent,
rates)
Variable costs vary with output
(materials)
Total costs sum of costs
Marginal costs cost of making one
additional unit (increment of variable cost)
Cost centres
If a product sells at 150 with costs of 100, then
the contribution or margin is 50, which initially
goes towards the operating costs of the business.
Direct Labour
45
45%
Materials
30
30%
Direct
Overheads
25
25%
Totals
100
100%
Cost management
Costs can vary over the lifetime of a
project or supply period
Purchasing are expected to deal with
price fluctuations, by monitoring suppliers
and reviewing cost/price analysis
information
Purchasings performance will depend on
how accurately and effectively they
anticipate problems, monitor variations
and proactively negotiate or look for
alternatives to price increases.
Fixed costs
All selling prices will include an element of
fixed costs
Fixed costs may be spread equally across
the organisation or on an activity basis
(ABC)
Buyers need to ensure that the selling
price they accept contains fixed costs
which are fair and relevant to that product
or service only.
performance
Session 3
Inventory management measures
IT and data management
Learning objectives
At the end of this session candidates will be able
to:
assess the advantages and disadvantages of
holding stock in a business operation
state the main elements of cost which will
accrue in the operation of a stores operation
show diagrammatically how costs are allocated
in sub-groups of inventory holding costs
summarise the key performance indicators for a
stores operation carrying inventory for a
manufacturing operation
evaluate how a manager would review the
performance indicators linked to inventory held
in terms of economy, efficiency and
effectiveness

state how IT systems are used in business
operations in general and where purchasing and
supply systems support the process in particular
define the main elements of a purchasing and
supply IT system
summarise the issues which, if measured, would
add value to the management of purchasing and
supply
summarise the issues which, if measured, would
add value to the management of suppliers within
an organisation
appraise how developments in IT technology can
assist purchasing and supply managers in both
current performance and future continuous
improvement issues
formulate a set of performance Indicators which
would assist a Purchasing Manager reduce costs
and or improve service delivery.
Stock-holding
Primary industry bulk stock for sale,
MRO spares
Secondary industry raw materials and
components inbound, added value, work
in progress, MRO spares, finished stock
for sale
Tertiary industry trading stock inbound,
admin and service stock, service delivery
stock.
Stock-holding
Factors affecting levels include:

scarcity of supply
uncertainty in supply market
poor sales/demand forecast
inefficiency in stock control
skills and experience of buyer
production will want to avoid a no stock

situation, Finance prefer limited stockholding (pushpull effect)
what other stakeholders will have
conflicting interests?
Cost of stock
The REAL
REAL cost
cost of
of holding
holding stock
stock
The
Cost of borrowing
money
or
The other uses to which

that money could be put
Costs of stores
buildings & stockyards
Financial
opportunity costs
Total opportunity
costs
and
Revenue costs of maintaining

stock in good condition, light
heat & maintenance
Physical opportunity
costs
pl u s
The human resources

needed to operate the
stores
Fig 5.2
Diagram from workbook
by Bryan Jones
Cost of stock
Costs mount up from stock coming in,
storage and handling and despatch
Costs depend on the type of stock and
why it is held
There may be hidden costs relating to
damaged stock and obsolescence.
KPIs
Financial KPIs (economy) for example,
stock turnover rate
Operational KPIs (efficiency) for
example, amount or range and depth of
stock
Stores/stock delivery (effectiveness) for
example, service levels
Pareto analysis
The Pareto Curve
80%
Total
Value
20%
Diagram from
workbook by
Bryan Jones
Total Number
of Items
Continuous improvement
Information from KPIs is used by different
levels of management for different
purposes:
store operatives will want to measure
weekly operational efficiency and
effectiveness rates
operational managers will want to plan
workload monitor service delivery outputs
in the medium term
senior managers will look at trends to
inform longer term strategic decisions.
IS/IT evolution
5
T he 5
IS /IT
evo lutio nary
steps
4 O p tim ise
3
In tegrate
2
1
C on so lid ate
O p era te
D eve lop te am w ork

B etter cr oss fu n ction a l
com m u n ic ation
B asic In form ation

L im ite d p r ocesses
In d ivid u alistic
S e p arate in d e p en d en t
S yste m s
S till som e variab le

q u ality
S till som e
d ep a rtm en tal in ter ests
E n te rp rise
in form ation
M or e in form ation
b ase d d e cisio n s
A w a ren ess of
im p ro ve m en t
op p or tu n ities
Im p rov ed
p erform an ce
m e asu r e m en t
In n o vate
S u stain ab le b u sin ess
m od el for th e
en terp r ise- E R P
cu ltu r e
In cr em en ta l
im p rov e m e n ts
Im p ro ved tar get

ach iev em e n t
A d d ed V a lu e
im p rov e m e n ts
B etter lin k s to
strategic p lan s a n d
vision
Im p rove d
su p p lie r
m an age m en t
Im p rove d
q u ality
m an age m en t
C ross d ep ar tm en ta l
in teg ration
B etter re latio n sh ip
m an age m en t d ata /
d eliv erab les
A d d ed valu e H R
system s
ig 6 .1 workbook
E v o lvin g in fo
a tio n sy
stem s
DiagramFfrom
byrm
Bryan
Jones
Typical supply chain databases

and outputs
Stock
inventory
database
Supplier
database
Purchase
order file
database
Purchasing
reports
SupplyChain
ChainIS
IS//IT
ITSystem
System
Supply
Supplier
reports
Purchase
orders &
contracts
Materials
Requirements
MRP
Stores/stock
reports
Purchasing
decisions
Purchasing Staff
Customer
orders
Supplier
performance
data
Fig 6.2 Typical Supply Chain

Diagram
from workbook
Databases and outputs
by Bryan Jones
reports
Customer
reports
Performance reports
IT systems generate a huge number of
reports for purchasing to use to measure
performance, including:
spend per buyer
cost per order raised
supplier database details
what types of data and information do you
use in your organisation?
while the above are objective, what
subjective measures are used?
Managing supplier base

Rank suppliers from highest to lowest by
spend
Identify the top 20% by spend value
(Pareto)
Concentrate relationship development
activity with this group
Review the critical nature of suppliers in
the lower 80%
Reduce the number of suppliers in the
80% list by weeding out those with whom
you no longer do business with or who
have duplicates higher up the spend list.
IT developments
Recent developments include:

interactive catalogues
e-bidding/e-tendering
supplier registration packages
intranet developments
how has IT impacted on your organisation

and the ability of the individual purchasing
professional to improve performance?
performance
Session 4
Why measure suppliers?
Steps in the supplier measurement process
Learning objectives
able to:
explain the link between supplier
performance and business success
summarise the measurement of suppliers
within the procurement function
define the contribution of measurement in
'quality management'
argue that the measurement process
contributes to the building of relationships
distinguish between the measurement
processes of supplier selection and
supplier evaluation

describe a situation where both business
stakeholders co-operate in performance
measures for mutual advantage
define the key stages in the buying process
describe the key steps in a pre-award
assessment process
describe the key steps in a pre-assessment
process - supplier evaluation
analyse the importance of internal and
external supplier feedback and corrective
action
formulate a process to undertake a
continuous review of the supplier
measurement process.
Measuring supplier performance

Supplier performance impacts on the
success of the whole organisation
Measure over time and benchmark with
competitors or published indices
Select measurements and abilities that are
relevant and impact on success at each
level of the organisation
Use appropriate tools and keep it as
simple as possible
Share the results with the supplier and
other appropriate stakeholders.
Supplier performance
How does supplier performance
impact on the five rights?

Price
Quantity
Quality
Place
Time
Basic measures
Delivery performance history and trends
Quality performance history and trends
Service performance history and trends
Pricing how do they price and
comparison with market prices?
Advanced measures
Overall capabilities
Financial history, strength and stability
Inventory location and methods
Innovation history and trends
Organisations might use a ranking or
weighting system for the critical measures
when making supplier comparisons.
Importance of quality
Diagram from workbook by Bryan
Jones
and John Oliver
Figure
7.1
Checked for
Quality
Check
product after
assembly
Check parts
before
assembly
Traditional
Built in
Quality
Check parts
at suppliers
plant
Designed in
Quality
Check parts
and process
at suppliers
plant
Joint design of
product and
processes up
the supply
chain
Progressive
Total Quality Management
Adversarial Relationships
ISO 9000 Certification
Quality control Departments
Supplier certification programmes
Batch checking
Cooperative relationships
Built in quality
Importance of quality
Purchasing might investigate suppliers
Production methods and workforce skills,
training and development
Service quality certification (for example,
ISO 9000)
Quality management systems (for
example, six sigma) and continuous
improvement processes
What measures are important for your
organisation?
Building supplier relationships

LearningJones
Activity and
7d
John Oliver
Customers
Close Monitoring
Information flow
Good relationships
Supplier
development
Strategy
Detailed measurement
Pressure to improve
Suppliers
Purchasing
Close relationship
Information flow
Performance feedback
Co-ordinated spproach
Figure
7.3
Jones
and John Oliver
Directors&&
Directors
senior
managers
senior managers
Directors&&
Directors
senior
managers
senior managers
Customerteam
team
Customer
Measurement
Measurement
Supplierteam
team
Supplier
Measurement
Measurement
Technical
Technical
Logistics
Logistics
Technical
Technical
Logistics
Logistics
Buying
Buying
Production
Production
Buying
Buying
Production
Production
Partnershipsourcing
sourcing
Partnership
Supplier relationships
Short term tend to be adversarial, oneoff, no relationship building, minimum
commitment
Short to medium term includes
negotiation, collaborative, relationship
builds
Medium to long term increased emphasis
on relationship and service benefits
Long term working towards partners
approach, relationship critical, shared
ideas and objectives.
Supplier assessment
Pre-award
Measuring suppliers potential ability
The concern is to select the right
supplier so that measurement is
designed to test how effectively the
supplier can meet requirements and
overall performance.
Vendor rating
Evaluation process
Measuring how well supplier has
performed in meeting requirements
Process may also include dimension of
performance improvement to develop
relationship.
Measuring supplier relationship

development
Willingness to interact and proactiveness in
seeking improvements
Ability to listen and use feedback to
improve performance
Willingness and capability of devoting
resources to relationship development
Business case impact on buyers ability to
get the right goods and services at the right
time, place, quality and price.
Supplier motivation
(Paul Steele and Brian Court, published in Profitable Purchasing
Strategies, McGraw Hill)
Attractiveness of customer
HIGH
Development Valued
customer
Core Vital customer
Nuisance Unimportant
customer
Exploitable Negotiate hard
LOW
Relative value of the account
HIGH
Purchaser-supplier satisfaction
(Reproduced from workbook by Mike Fogg)
(5,10)
(10,10)
Complete
Satisfaction
(0,10)
Quadrant A
Both parties
satisfied
(10,5)
(0,5)
Marginal
Dissatisfaction
Suppliers satisfaaction
Quadrant C
Purchaser dissatisfied
Supplier satisfied
Quadrant B
Purchaser satisfied
Supplier dissatisfied
Quadrant D
Both parties
dissatisfied
(0,0)
Total
dissatisfaction
(5,0)
Marginal
Satisfaction
Purchasers satisfaction
(10,0)
Complete
Satisfaction
Pre-award assessment
Basic supplier selection one-off, low
value
Supplier categorisation approved
supplier, preferred supplier
Advanced supplier selection key
suppliers, high risk and/or value
purchase.
Pre-award assessment
Step 1
Plan and
prepare
Step 4
Recommend
and feedback
Step 2
Action and
individual
assessment
Step 3
Evaluate and
Report results
Figure
8.2
Diagram from
workbook
by Bryan
Steps
in
a
Pre
Award
Assessment
Jones and John Oliver
Post-award evaluation
Basic vendor rating simple monitoring
(five rights)
Advanced vendor rating more review
and feedback, planned in advance
Supplier development looking in greater
depth at process, management and
design issues
Partner suppliers suppliers have
different status.
Post-award evaluation
Plan
Pilot
Implement
Results
Review
Closedown
Feedback
Feedback from different sources is used to
measure and improve performance
Suppliers need feedback to improve
performance
Purchasing need feedback from internal
and external customers to improve
performance
Feedback mechanisms consider who,
what, why, where, when and how.
Performance review schedules

Level 1 daily or weekly

Level 2 - monthly
Level 3 - quarterly
Level 4 - yearly
Special issues/Emergencies as required
Attendance at review meetings depends

on the circumstance but should include
the relevant level of authority.
performance
Session 5
About measurement tools performance measurement
Learning objectives
able to:
demonstrate the different performance
measurement 'tools' for various categories
of supplier and activity
distinguish between qualitative and
quantitative measurements.
appraise the issues involved in designing
measurement systems and ensuring data
availability
propose the involvement of other
stakeholders in the measurement process.
compare the benefits of a desk-based and
visit-based approach

summarise some generic methodologies for
performance measurement
explain and give examples of the basic
process of vendor rating
explain and give examples of the category
approach to supplier performance
measurement
summarise the benefits of using weighted
measurements
explain the advantages of third party
involvement and testing procedures
plan audit processes to avoid financial or
performance fraud.
Performance management
Tools and techniques used:
Systems and information-based research
(ERP, DRP, MRP,)
Performance management and
accreditation (ISO standards, Vendor
rating)
Management theory and analysis (Pareto,
SWOT, ABC, Kraljics matrix)
Quantitative tools
Objective, measure quantity such as
component quality and response times to
call-outs
Results can be compared over time easily
Focus on efficiency and improvement
When would you use such tools?
Qualitative tools
Subjective, measure judgements such as
attitude to technology
Can be difficult to measure and compare
Focus on improved perception,
effectiveness and contribution
When would you use such tools?
Planning measurement
Identify clear purpose and objectives
Review what is in place already
Identify resources needed
Involve appropriate others, both internal
and external stakeholders
Plan how to action, analyse results and
present feedback.
Process methods
Desk-based research
Supplier visits
Meetings, interviews and discussions
When would you use each of the above?
Measurement methods
Statistical simple, complex, weighted,
cost ratio rating
Perception based 7 Cs, simple, complex
rating
Research financial analysis, references
Standards and accreditation TQM
systems, ISO
Self-assessment suppliers existing
system or jointly planned.
The 7 Cs

Competency
Capacity
Commitment
Control
Cash
Cost
Consistency.
Third party involvement

What are the advantages and
disadvantages of using a third party to
test suppliers?
External testing houses can test specific
performance or check compliance (ABCB
Association of British Certification
Bodies)
A mystery shopper may be used to
check service quality.
Audit trail
Financial audit
Process audit
Value for Money (VFM) audit.
performance
Session 6
Communication
Financial appraisal
Learning objectives
able to:
determine how different types of
communication can support business
relationships at all levels - strategic,
tactical and operational
explain the link between communication,
performance measurement and
relationship building
analyse the importance of good
communication mechanisms within
performance measurement systems

argue the importance of good
communications in resolving disputes and
managing conflict
describe some of the different types of
communication mechanisms available
describe the role and input for the finance
department in performance management
explain the benefit of undertaking
corporate financial appraisal on
appropriate suppliers
demonstrate the advantages of specialist
third party vs internal appraisal
list specific financial assessment
measurement tools and understand some
specific application examples.
Communicating with suppliers

Diagram from workbook by John
Figure 11.1
Oliver and Bryan Jones
Directors
Managers
Supervisors
Operatives
Long term relationship

development and overview
of performance
Medium term planning and

communication including
detailed performance review and
planning.
Short term communication and

planning with suppliers on site
representatives and supplier
management. Some input to
performance review.
Day to day
communication,
perhaps with suppliers
on site representatives
Benefits of effective
communication
Benefits exist for both supplier and
purchaser and their organisations
Better understanding of each others
business and needs
Improved interpersonal relationships and
interactions
Joint planning to simplify and streamline
processes and solve contract
management problems
What other benefits can you think of?
Effective communication
Establish the purpose early in the
relationship
Adversarial style is likely to be less
productive than collaborative
Strategic relationships are more critical
than tactical
Effective communication is essential to
contract management.
Conflict

Interpersonal
Intrapersonal
Intergroup
Intragroup
Interorganisational
Can be positive!
May be difficult to manage!
When does it cause deadlock?
Conflict resolution
Challenge perceptions and seek the facts
Adopt a problem-solving approach, not a
competitive one
Deal with emotional issues calmly
Focus on the future what each party
wants to achieve
Deal with emotions and behaviours.
Conflict resolution strategies

Encourage both parties:
to take time out to calm down
to see what the problem looks like from
the other side
manage the substantives including the
salami technique
focus on common ground before moving
into areas of profound disagreement
highlight positives and attractiveness of
offers.
Disputes
When dealing with disputes refer to
company policies and procedures; options
include:

resolve yourself or
refer to relevant level of management
refer to arbitration or mediation
refer to law.
Financial appraisal
How would you use the following
information about suppliers to aid
purchasing performance?

Balance sheet analysis

Income statement analysis
Cost control analysis
Credit rating checks
Annual report analysis
Dun and Bradstreet Report analysis
Financial performance and ratio analysis
Audit results.
Financial appraisal
Warning signs include:
Redundancies and high staff turnover
Increasing stocks and slower turnover
Late presentation of accounts
When has financial appraisal impacted
negatively on selection of a supplier for your
organisation?
Occasionally organisations use third parties
to conduct financial appraisal; when might
this be useful?
Performance ratios
Profit
Return on
Capital/Yield
Capital
Employed
Profit
Margin
Profit
Sales
Sales
Capital
Employed
Figure
12.1 by John
Diagram from
workbook
Debtors
Creditors
Oliver and Bryan Jones
Stock
Cost of
sales
Sales
Cost of
sales
Asset
Turnover
Financial status ratios
Current
Assets
Diagram from
Figure
12.5
Figure 12.2
workbook
by
John Oliver and
Bryan Jones
Current
liabilities
Current assets
less stocks
Current
liabilities
Current ratio
Acid test !
Measuring purchasing performance

Session 7
Other performance measures
Supplier development and supplier account
management
Learning objectives
At the end of this session candidates will be able
to:
describe the internal and external commercial
relationships found in most organisations
propose other areas for measurement activity
describe the potential for joint performance
measurement initiatives
explain supplier surveys and benchmarking
develop and control suppliers in a more
positive way
demonstrate the value of being able to identify
key suppliers
define supplier development
define and understand supplier account
management.
Relationship management
Internal and external relationships are not
always appropriate may be too close or
not based on mutual respect
Each party may be seeking to further their
own interests at the expense of the other
Inappropriate internal relationships may
prevent effective flow of information
needed for purchasing
What experience have you of relationships
that hindered purchasing performance?
Relationship management
by
John Oliver and Bryan Jones
Figure
13.2
Customers
Co-ordinated
contacts/relationships
work to a common plan
Positive links and

relationships
Supplier
development
Strategy
Pressure to improve
Suppliers
Purchasing
Co-ordinated
contacts/relationships
work to a common plan
Supplier performance
Particularly for high-risk or high-value
contract, in addition to financial strength,
purchasing might assess supplier:

overall performance
workforce training and development
quality assurance
process/material flow
housekeeping and management style
environmental and ethical policies
what additional measures do your

organisations use?
Joint performance initiatives

Figure
by 13.3
John Oliver and Bryan Jones
Buyers
Cross functional
Quality Team
Suppliers
Cross functional
Quality Team
Buyers
Cross functional
Quality Team
Suppliers
Cross functional
Quality Team
Buyers
Cross functional
Quality Team
Suppliers
Cross functional
Quality Team
Both organisations develop

cross functional teams.
Working relationships
develop
Working relationships
become well developed
Initial tensions and some

difficulties
Two way communication

brings teams closer
together
Good relationships mean

teams have little between
them
Adversarial
Cross Organisational
Cross functional
Quality Team
Matured teams function as

one organisation
Benchmarking

Internal
Competitive
Functional
Generic
Phases of a benchmarking exercise are
planning, analysis, development,
improvement and implementation and
review
How is benchmarking used in your

organisation?
Benchmarking
Problem areas include:
selection of appropriate comparator
duration of the exercise to make it
meaningful
can be time consuming and heavy on
resources
availability of the right information.
Supplier surveys
An easy and popular way of getting
feedback on purchasing performance:
need to incentivise the supplier
undertake the same survey regularly to
assess trends
gather quantitative and qualitative
information
can be anonymous!
act on the feedback!
Supplier relationships
It is not always appropriate to work towards a
cooperative relationship:
organisations culture may be more
adversarial
long-term working is not appropriate
one-offs are more common
geographical or market issues might
prevent closer working
time and resources may not be available
what other reasons can you think of?
Supplier account management

Figure
14.1 Oliver and Bryan Jones
by John
Leans towards working with
suppliers.
If beneficial will include full
partnerships with key
suppliers
Co-operative
Co-operative
Co-operative strategies
and partnerships.
Supplier mentoring and
supplier development tools
Tries to adopt a relationship

strategy based on need and
optimised results
Leans towards competitive

relationships with suppliers.
Balanced
Balanced
Adversarial
Adversarial
Will apply a range of tools

and techniques according
to requirements.
Buyer aims to be in charge
Needs to control suppliers

through supplier account
management or similar
Key suppliers
Might be critical for a number of reasons:

high demand, scarce supply

volume of business
value of spend
level of relationship developed
specialist skills or service benefits.
Key suppliers
Figure
14.2Oliver and Bryan Jones
Diagram from workbook by
John
High
Bottleneck
Bottleneck
==
Lowvalue,
value,high-risk
high-risk
Low
Strategic/Critical
Strategic/Critical
==
Highvalue,
value,high
highrisk
risk
High
Routine/noncritical
critical
Routine/non
==
Low
value,
low-risk
Low value, low-risk
Leverage
Leverage
==
High
value,
low-risk
High value, low-risk
Supply
Exposure
(market
Risk)
Low
Relative spend
High
Supplier account management

Develop as full an understanding as possible
about the supplier
Involve the supplier and relevant internal
staff in building and developing the
relationship
Identify key account responsibilities to
specific staff and review progress regularly
Requires time and resources!
performance
Session 8
Why measure buyers performance?
Cascading targets and objectives
Learning objectives
able to:
describe the benefits to the buyer of good
performance management
summarise the aims of measuring buyer
performance for the organisation
distinguish between periodic, on-going
and annual measurement options
explain the links to reward and
advancement
summarise problems with poorly managed
measurement schemes
explain the wider national view and
structured approaches such as 'Investors
in People'

define the concept and benefits of
managing through objectives
summarise the process by which targets
and objectives cascade from the business
planning process
design positive objectives which conform
to the SMART approach to objective
setting
demonstrate the possibilities of different
timescales for objectives
analyse problems which can arise during
objective setting
demonstrate the benefits of feedback,
audit and review of the objective setting
process.
Measuring buyer
performance Performance Agreement
Agree role description
Agree plans to achieve
performance and development
objectives
Annual Review
Review performance
against:
performance objs.
development plan.
key areas of
responsibility
Continuous feedback,
support and
information on
contribution to overall
business objs.
Underpinned by a
culture of openness,
trust and respect
Interim Review
Review progress to
date against
performance and
development objs.
Review current validity
of objs.
Note any changes in
employee role or
competences
Purpose of review
To review current performance
To set objectives for future performance
To aid manpower planning
To assess training & development needs
To determine pay increases.
Benefits of review

Sharing of aims and objectives

Clearer working goals
Stimulation of new ideas
Provides feedback on performance
Opportunity to identify problems
Motivates buyer
Identifies training/development needs.
Linking performance to reward

Advantages include individual recognition
of individual contribution and motivation of
top players
Disadvantages include potential
demotivation of poorer performers and
perceived unfairness
Purchasing do need to find ways of
developing and nurturing talent and high
achievers.
Setting objectives
Linked to overall business objectives
(bigger picture)
Must be clearly understood and stretching
but not unrealistic
SMART Specific, Measurable, Agreed,
Realistic and Relevant, Time-bound
Identify and discuss barriers to
achievement.
Cascading objectives
(Diagram from workbook by John Oliver and Bryan Jones)
Format of objectives
Action verb +
Object +
=
(To do something) (to something)
End result
(to achieve a
measurable
outcome by
a specific time)
Timescales for objectives

May be short, medium or long term
Should be reviewed regularly to identify
achievement and consider whether still
appropriate if medium or long term
Daily targets are not usually set during
formal annual appraisal.
Constructive feedback
Prompt
Respectful
FEEDBACK
Supportive
Factual
performance
Session 9
Appraisal and evaluation techniques
Training and staff development
Learning objectives
able to:
describe informal and formal appraisal
and evaluation techniques
evaluate the benefits of a quantitative or
qualitative approach
explain the main components and issues
in an interview based appraisal process
summarise the self-assessment approach
to appraisal
propose the involvement of others in the
appraisal process
define the issues which can arise if the
appraisal process fails to work effectively

describe the stages and benefits of
developing a training needs analysis (TNA)
distinguish between job profiles and job
descriptions and how they influence a TNA
argue the benefits of focussed rather than
non-focussed approaches to training and
staff development
summarise the different types of training
available
explain the concept of continuous
professional development
evaluate the success of training for the
individual and the business.
Performance review
Motivation
Understands
contribution
Performance
improvement
Development
Purpose of
performance
review
Based on analysis not

judgement
Effective performance review

Enable two-way discussions of present
and future performance
Related to measurable work objectives (to
aid objectivity)
Focus on behaviours and facts, not fuzzy
judgements of personal qualities
Set clear standards and challenging
performance objectives
Identify training and development needs
Focus on potential career steps and goals.
Self review
Usually qualitative, seeking personal view
of performance during the period under
review
Some buyers will overrate themselves and
some will do the opposite, so encourage
them to provide evidence
Encourages the buyer to consider future
career and what training and development
is required.
Formal review process

Consider preparation required
Make appointment
Issue self-review form
Receive completed self-review form
Set agenda for interview
Conduct interview to set objectives and
identify training and development needs
File documentation
Follow up with buyer to review progress
on objective achievement

How would the above differ to an informal

review process?
Quantitative measures
Objective measures based around
numbers and values
Usually task based
Focus on efficiency and improvement
To increase number of invoices processed
per week by 10% over the next 6 months.
Qualitative measures
Subjective measure judgements, such
as attitude to customers
Can be difficult to measure and turn into
targets
Focus on improved perception,
effectiveness and contribution
To improve meeting skills to be able to
take over as chair of team meetings by
end of year .
Preparing to review
Gather information on performance
previous appraisal, job description, reports
on work performance, interviews with
managers buyer works for, customers,
suppliers
Collect facts and evidence, not opinion
Consider issues and how to address
Compile and issue agenda
Make notes to inform discussion.
Review meeting

Two-way discussion
Aim for a constructive/positive approach
Examine constraints and opportunities
Summarise and agree targets
Identify training and development needs.
Follow-up
Make sure agreed support is provided and
no barriers to achievement persist
Carry out interim review to check progress
Do not stop day-to-day monitoring and
review of performance because there is a
formal review system.
Training needs analysis

Identify performance gap which is the gap
between the current performance and
what is required
Training problem - or not?
How can needs be met?
How will success be measured?
Meeting development needs

Training courses and professional
qualification
Open learning materials
Coaching or mentoring
Work shadowing experienced colleagues
Deputising for experienced colleagues.
performance
Session 10
Information and individual performance
management
Buyer and supplier performance links
Learning objectives
At the end of this session candidates will be able to:
describe the importance of data to the
measurement process
explain the need for access to the corporate and
departmental planning process, and effective
systems design
summarise the types of data which may be used
list the sources of data which may be used
evaluate the weaknesses of existing approaches
to performance measurement
argue that there is a need and benefit from
relating performance to wider issues
define potential performance measurement links
to suppliers
define possible performance measurement links
to other stakeholders.
Data
In order to objectively review performance,
data must be:
relevant
up-to-date and cover the period under
review
valid and reliable
accurate, fair and impartial
facts and evidence, not opinion and
judgement.
Data collection
Can be time-consuming
May not be available in the right format
May be qualitative or quantitative
May be standard or specific to that job.
Types of data
Basic or transactional
Departmental related to internal
performance
Operational performance
Strategic performance.
Sources of data

Departmental systems
Operational systems
Personally managed systems
Customers internal and external
Managers report to
External suppliers
What is 360 degree appraisal?
How to kill performance review

Lack of commitment and support from the
top
Insufficient time allowed for preparation
Rushed interview
Lack of skills (reviewers)
Poorly designed scheme that is complex
and time-consuming
Inaccurate recording
No buy-in (employees)
Concentrating on the positive or negative
Avoiding uncomfortable issues
Lack of organisational context
Lack of follow-up
Information not used by organisation.
Stakeholder involvement
Relevant stakeholders to the organisation
add significant information that may not
be available elsewhere
In order that purchasing meets its overall
objectives buyers must be ambassadors
at every interface with stakeholders
What is the degree of stakeholder
involvement in your appraisal?
Buyers and suppliers

Suppliers assess buyer performance
from an external perspective
Data will relate to operational and
personal issues for example,
interpersonal skills relating to negotiation,
courtesy, helpfulness
How are selected suppliers involved in
your performance appraisal?

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Measuring purchasing

Learning objectives (contd

Learning objectives (contd)

Purchasing Performance Management within the Organisation

Performance measures (KPIs)

cost & service

Purchasing :the key tasks within a business /organisation

Diagram from workbook by Bryan Jones and John Oliver

Within your organisation, what

Value chain (Porter)

Inbound Operations Outbound Marketing

The Purchasing Process and its stakeholders

Diagram from workbook by Mike Fogg

Maximising added value opportunities

Total cost of ownership

Learning objectives (contd)

Learning objectives (contd

The Corporate Business Plan

Fig 3.1 Business Planning : The Purchasing Link

Diagram from workbook by Bryan Jones

Performance measures (KPIs) 6

Data & Information flow

Diagram from workbook by Bryan Jones

How purchasing fits and works with other

knowledge, skills and attitude

what are the competencies that you need

Cost and price

Cost and price

Learning objectives (contd)

production will want to avoid a no stock

The other uses to which

Revenue costs of maintaining

The human resources

D eve lop te am w ork

B asic In form ation

S till som e variab le

Im p ro ved tar get

Typical supply chain databases

Fig 6.2 Typical Supply Chain

Managing supplier base

how has IT impacted on your organisation

Learning objectives (contd)

Measuring supplier performance

ISO 9000 Certification

Quality control Departments

Supplier certification programmes

Building supplier relationships

Measuring supplier relationship

Core Vital customer

Exploitable Negotiate hard

Performance review schedules

Level 1 daily or weekly

Attendance at review meetings depends

Learning objectives (contd)

Third party involvement

Learning objectives (contd)

Communicating with suppliers

Long term relationship

Medium term planning and

Short term communication and

Conflict resolution strategies

Balance sheet analysis

Financial status ratios

Measuring purchasing performance