Measuring Purchasing Effectiveness

Measuring Purchasing Effectiveness

Success in reducing cycle time can be readily measured both quantifiably and qualitatively. As a result, purchasing professionals must ensure that initial cycle-time benchmarking is carefully done before any measurements of success or outcomes are put into place.

The CAPS study, Purchasing’s Contributions to Time-Based Strategies (Thomas E. Hendrick, Ph.D., 1994) lists 10 outcome areas that give direction in measuring the success of cycle-time reduction efforts. The 10 outcomes and suggestions for effective cycle-time measuring follow.

  1. On-Time Delivery
    Enhanced methods to measure on-time delivery include separating components into “A,” “B,” and “C,” categories (“A” being the top priority). Strategic materials must arrive on time. The nonstrategic material deliveries should be tracked differently. Their purpose is an ancillary supporting role with more delivery leeway being tolerated. To distinguish these categories of delivery, many companies break delivery performance down into these “A,” “B,” and “C” categories with different percentage goals in each category. One nontraditional measurement is the number of “no-hitch” or perfect deliveries. This means a smooth delivery with zero redundancies and no extra nonvalue-adding work.
  2. Inventory Reduction Measurements
    Measure improved inventory accuracy, labor hours saved taking inventory, elimination of racks, shelves, and materials handling equipment, and reduced maintenance costs. Don’t stop here. Many suppliers readily agree to hold materials on a consignment basis. This is a valuable cost-avoidance and cash-flow improvement. Whenever possible, drive to get agreement to pay on consumption.

Also, track reductions in supplier inventory. This will help them reduce or hold down their costs to you. Measure inventory committed to by suppliers and value of materials that are now on consignment or on pay-on-consumption systems. Make note of the various functions or departments that are outsourced. Obtain realistic estimates of the amount of inventory and overhead that would have been required to support these activities if they were not outsourced.

  1. Increase in Inventory Turnover
    Focus your efforts on the “one-touch theory” and the “speed to point of use” for materials or services. Track the number of materials or services that are touched by only one person in the process right at the point of use or where they are directly needed. Count the total number of transactions processed directly by the end user without any purchasing or middleman interface. A bonus would be that they arrive directly to the end user precisely at the point of use in the manufacturing process. Measure the time it takes for all materials or services to hit your property and get to the point of use.
  2. Decrease in Total Cost of Ownership
    Identify your cost drivers first. These are your significant cost factors that drive the cost of a material or service. Then concentrate on the costs that are usually reduced or eliminated by faster cycle time but often forgotten in the rush. Measure areas in which processes got simpler and training costs were decreased.
  3. Visibility and Appreciation
    Measure the number of cross-functional teams that purchasing participates in and leads. These can be broken down into three general arenas: design, process, and administrative. Also, keep a record of the number of times other departments come to your department to seek input, advice, and basic participation on strategic planning. Track the number of suppliers that add value to your products at the design stage and the results of their efforts.
  4. Increased Integration of Purchasing Strategy into Corporate Strategy
    Create a five-year strategic plan for purchasing and integrate it into the companyƍs overall strategic plan. Get out into the field with sales and marketing to find out what the final customer really wants in your product, and get the materials and services to meet these needs. Keep track of the number of final customer contacts and the number of changes made because of their input.
  5. Increased Cooperation from Suppliers
    Document all supplier-driven innovations and improvements. Increase and document the number and type of direct links with suppliers, especially direct electronic ties to your production schedule and EDI. Develop in-depth alliance relationships with a few key suppliers at a strategic level to make your quantum leaps in cycle-time reduction. Then measure the success of the alliance by measuring the reduced cycle time. Also, survey your key suppliers and ask them what they think of the progress of the alliances.
  6. Decrease in Manufacturing Cycle Time
    Keep the tracking of this key parameter simple, to the point, and at a macro level. Show the number of products or widgets made compared to the cost of goods sold. Thus, if you cut cycle time by 50 percent you should make approximately twice as many widgets with about the same cost of goods sold. Realistically, the cost of goods sold will have to increase, but cycle-time reduction can radically hold down the rate of increase.
  7. Purchasing’s Internal Customer-Client Satisfaction
    Start an ongoing internal customer focus team to evaluate the performance and service of purchasing. Periodically use surveys of internal customers, final customers, and suppliers to obtain valuable feedback and direction on how to reduce cycle time.

Always include in customer-satisfaction surveys the question, “Has the response time to your request increased, decreased, or stayed the same?” Don’t forget face-to-face feedback meetings.

  1. Manufacturing Flexibility
    When measuring flexibility in the manufacturing process, focus on reducing the total number of parts. Purchasers can track increases in the number of easily obtainable standardized parts and services with zero lead-time. Also, suppliers can preassemble and assist in these types of efforts.

Don’t neglect the administrative cycle time in a purchasing department — whether you work for a manufacturing company or a service organization. Purchasers can set cycle-time standards in their departments and streamline all procedures to speed things up. For example, procurement cards and system-purchasing systems can help reduce cycle time.

With these 10 measurements, your efforts to reduce cycle time will become focused and can be easily understood by your customers and suppliers.