Has Procurement Got Its KPIs Right?

As the Procurement function evolves, its KPIs remain old-fashioned. Bertrand Maltaverne explores the surprising results of a Procurement KPI survey.

In a rather interesting coincidence, just as ProcureCon Europe was releasing a benchmarking paper called Procurement Challenges, we released a white paper that also focuses on one of the most fascinating challenges in the industry: The Direct Material Procurement Challenge.

More than a coincidence, this is a sign of the times as the role of Procurement and its position in organisations rapidly becomes quite a recurring hot topic.

Before going into the specifics of ProcureCon’s report, the challenges that Procurement faces stem almost entirely from the transformation Procurement  is going through as a function.

Value vs. Cost reductions

“As businesses emerge from the recent recession into a fragmented supplier ecosystem, a normal approach to creating value through cost saving alone is no longer relevant.”

ProcureCon’s report is not the only one to highlight the current gap between a value-­based Procurement approach and the actual KPIs that most organisations track, specifically:

• 91 per cent of surveyed organisations have cost savings as a KPI;
• 76 per cent have cost avoidance as a KPI.

KPIs for value metrics like quality, risk, and cycle times languish respectively in 5th, 8th, and 12th place! Fewer than 50 per cent of companies track these measures.

More troubling: only 30 per cent track Procurement ROI as a KPI. ROI (Return On Investment) or VFM (Value For Money) is actually the main KPI that all organisations should aim for as it synthesises the ratio between value generated and energy or resources employed. Or, in other words, a measure of the effectiveness and efficiency of a Procurement organisation.

Supplier Management Core Procurement Activity

Among the many interesting insights in the report, there are two aspects related to supplier management and stakeholder management that are kind of interesting. They both relate to the qualification of suppliers and are quite revealing.

Procurement still operates too much in a silo

“Procurement typically take the lead when it comes to the qualification of contractors and suppliers during the bid process.”

Decisions regarding sourcing have to be cross-­functional. Not only to ensure that all aspects have been looked at but mostly to ensure adoption of the decisions. Involving other departments in the decision-­making process is critical.

Even better, involving them in the early stage of defining a category’s strategy is vital to define the value that they expect suppliers to deliver. This may not be low prices alone.

Procurement still sees suppliers as trading partners, not business partners

There are also a couple of surprises when it comes to the dimensions Procurement looks at when assessing new potential suppliers. We assume this also reflects the KPIs tracked afterward.

Not surprisingly, financial stability comes first. As a former purchaser, I can say this fits with the practices I have seen on the field. This is not without inherent risk: “conducting a single financial stability check (e.g. D&B check) before engaging a supplier could provide a false sense of assurance.”

More surprisingly, CSR-­related themes like sustainability and safety stand squarely in the middle of the list. Around 50-60 per cent of respondents say they include these factors in their assessments. A notable exception is diversity, which comes last on the list with only 20 per cent of respondents taking this into account.

Issue of Supplier Innovation

But, very surprisingly, competent advice is a criterion that is at the bottom of the list, covered by only 29 per cent of respondents. This is especially surprising considering the focus on the role of Procurement in organisations, and its impact on innovation. The lack of attention on this area is rather troubling.

As we understand it, if organisations do not measure if suppliers could be a source of new ideas and suggestions, it means that they do not expect suppliers to be able to participate in their innovation process. This quite a self­-centred view of innovation!

In conclusion, there seems to be a consensus within the Procurement community that Procurement is not in the place it deserves to be, and that, in the future, its importance will grow. For example, ProcureCon’s report says that 62 per cent of respondents to their survey estimate that Procurement will move towards making board-level decisions in the next 3 years.

But, as far as their report and many others show, there is still a gap in capabilities and delivery that needs to be bridged before we get there.

Now is the time for Procurement to evolve!