The purpose in measuring procurement performance is to give people feedback on their achievement of the goals and targets that they have been set. The way to do this is to decide what needs to be measured, set targets for the level of performance that you want, compare current performance against those targets, decide what action (if any) needs to be taken and then check that the action has been taken and has been effective.
Here is a simple 9 step process for how to measure procurement performance.
1. Write down your key objectives. Remember that a goal is a broad statement of your intentions and an objective is a means of achieving the goal. It has a beginning and an end and is measurable. For example, our procurement goal might be to realise significant benefits for our organisation. Our objective might then be to reduce costs in the next 12 months by achieving an average 5% price reduction through better sourcing strategies. Your primary objectives should be traceable to your corporate objectives to show how your role supports the organisation.
2. Identify the activities that are critical for achieving those objectives. In our example, critical activities could be to assess supply risk for those categories that account for 80% of our total spend and to develop sourcing strategy options for the high spend, high risk categories.
3. Decide the best way to measure those activities. For our example, this could be to have a governance process that approves the sourcing options that we develop so one way to measure the activity would be to measure the percentage of sourcing strategies approved to the number submitted.
4. Set targets for the activities. Now that we have a way of measuring the critical activities we must now set targets. In our example, this could be to have an initial target of 60% of sourcing strategies submitted for review are accepted.
5. Decide what data you need to collect. The data you need will be dictated by the performance measure that you set.
6. Allocate responsibilities. Data does not get collected, analysed and reported on by itself. These tasks must be allocated to those who have the skills and aptitude to do them. Having the time to do it might be an issue that needs to be addressed by looking at their priorities and re-setting them as needed.
7. Turn the data into meaningful information. Data on its own usually has no meaning - it is just a collection of facts. However, when you have processed, organised and structured it, you have created information - intelligence that enables you to take action. For example, data that tells you how much was paid for a list of items is not valuable on its own. When you have processed it so that you have an analysis showing that you have paid different prices for the same item to different suppliers - you have useful information.
8. Communicate the results. Your performance measures need to be communicated. This is because they will be acted upon by different people at different organisational levels. In particular, the results of your measures need to be linked to processes, to improvement projects and to the people responsible for both. This needs a performance management system.
9. Take action. Knowing that performance measures either exceed or fail to meet the targets you have set is of no use unless someone takes action. This can be corrective action to get you back on track or action to further improve performance.
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