Strategic Performance Metrics for Purchasing and the Supply Chain

Many purchasing organizations struggle with choosing the appropriate metrics to evaluate their performance. Often, they prioritize tactical and transactional metrics, neglecting the strategic ones. This approach perpetuates a stereotypical view of purchasing as traditional and bureaucratic. By emphasizing strategic metrics, purchasing organizations can foster a different perception of their role and, more importantly, encourage strategic behaviors among purchasing professionals.

One key strategic metric is the number of supplier alliances. These alliances should be limited to a select few suppliers who have a significant impact on the organization's total cost of goods sold. Typically, 20% or fewer of the suppliers account for 80% of the spend. The focus should be on suppliers that can differentiate the organization or provide a distinct competitive advantage. Characteristics of such alliances may include long-term evergreen contracts, participation in new-product design sessions, joint process improvement efforts, exchanges of executives, direct electronic links, and cycle lead time reduction.

Supplier alliances go beyond mere transactional relationships and foster a deep level of collaboration and trust. By working closely with a limited number of strategic suppliers, organizations can tap into their expertise, innovation capabilities, and market insights. This can lead to joint value creation, improved product quality, faster time-to-market, and greater supply chain resilience. Supplier alliances also facilitate knowledge sharing, which enhances mutual understanding and alignment of goals, resulting in more effective problem-solving and continuous improvement initiatives.

Another important metric is the number and percentage of certified suppliers, such as ISO 9001 or ISO 14001 certifications. While these certifications do not guarantee perfection, they indicate that suppliers are committed to pursuing excellence and have a solid understanding of their processes and performance. This serves as an essential first step in any joint supply chain process improvement effort. Suppliers dedicated to their own continuous improvement programs, such as Lean or Lean Six Sigma, are more likely to engage in collaborative ventures.

Certified suppliers demonstrate their commitment to quality management, environmental sustainability, or other specific standards. By partnering with certified suppliers, organizations can ensure adherence to best practices, regulatory compliance, and risk mitigation. Certification also indicates a supplier's willingness to invest in process improvement, which aligns with the organization's goals of efficiency, quality, and sustainability. Such partnerships enable organizations to build a robust and responsible supply chain that meets customer expectations and withstands market fluctuations.

In addition to aligning with the corporate plan, leading-edge purchasing departments should have their own five-year strategic purchasing plan. This plan should encompass future initiatives, projects, metrics, goals, and required resources. It provides a roadmap for the procurement function and serves as a guide for driving strategic transformation within the organization. The strategic purchasing plan should align with the overall business strategy, taking into account market dynamics, technological advancements, and evolving customer expectations.

The plan should address key areas such as supplier diversification, supply chain risk management, sustainability initiatives, and supplier relationship management. By setting clear goals and objectives, the strategic purchasing plan enables the procurement team to focus on activities that deliver tangible value and contribute to the organization's strategic priorities. It also helps allocate resources effectively, identify skill gaps, and implement continuous improvement initiatives.

A noteworthy area to include in the plan is professional development. Purchasing team members should be encouraged to pursue professional certifications, such as Certified Professional in Supply Management (CPSM) or Certified Professional in Supplier Diversity (CPSD). These certifications validate their expertise and demonstrate a commitment to professional growth. Additionally, purchasing professionals should broaden their industry knowledge beyond just materials and procurement, gaining insights into market trends, emerging technologies, and customer preferences. By staying informed and continuously learning, they can make more informed?decisions, identify strategic opportunities, and contribute to the organization's overall success.

Another strategic measure is the establishment and continuous updating of a sourcing methodology based on market and global conditions. This methodology should involve cross-functional teams, utilize the Porter Five Forces model when appropriate, and prioritize high visibility and transparency during supplier selection. By involving stakeholders from various functions, such as engineering, finance, and operations, organizations can gain a holistic perspective and ensure that sourcing decisions align with broader business objectives.

The Porter Five Forces model helps organizations analyze the competitive landscape, supplier power, buyer power, potential substitutes, and barriers to entry in a particular industry. By applying this framework, organizations can assess the attractiveness of suppliers, identify potential risks, and develop appropriate sourcing strategies. High visibility and transparency during the supplier selection process enable effective evaluation, comparison, and decision-making, ensuring that the chosen suppliers align with the organization's strategic goals and objectives.

Ideally, these strategic metrics should be displayed on a corporate dashboard accessible to all employees. Strategic metrics should also serve as the foundation for developing a balanced scorecard for purchasing. The balanced scorecard provides a comprehensive view of performance by considering multiple dimensions, such as financial, customer, internal processes, and learning and growth. By measuring and tracking strategic metrics, organizations can monitor progress, identify areas for improvement, and align the efforts of the procurement function with the overall organizational strategy.

Unfortunately, purchasing departments often neglect strategic metrics and instead focus on fire-fighting and tactical metrics. However, strategy always trumps tactics, and strategic metrics need to become a valued tool for all purchasing organizations. By embracing strategic metrics, organizations can elevate the role of purchasing, foster a culture of strategic thinking, and drive long-term value creation across the supply chain. Through effective measurement and continuous improvement, procurement professionals can become strategic partners and make a significant impact on the organization's success.