Driving Procurement Value Through Key Business Metrics

When you can’t measure something, it is very hard to substantiate your value. As a result, I’m a big advocate of tracking metrics for tasks, transactions, and processes that “tell a story” about trends and overall performance. Establishing a baseline is usually the first step towards actionable visibility.

Questions like…

  • How many suppliers am I doing business with?
  • What is our spend concentration with top suppliers?
  • What % of our overall spend do these top suppliers represent?
  • What categories are they covering?
  • Do I have contracts in place with my supply base (with the right T&C’s)?
  • How are we managing spend to the contracts?  % spend on contract?
  • How many suppliers represent 75% of our spend, then how many represent the remaining 25% of our spend?  (this is usually a rude awakening)

…are hard to answer without basic visibility into spend and suppliers. Understanding where you are today is the first step in reaching a better place tomorrow. This process often involves a few surprises – even internally – as members of the leadership team learn more about the current supply situation for the first time. This information is a powerful motivator for necessary change.

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For example: procurement may discover (and then communicate to company executives) that they are spending money with 3,000 suppliers – a very large number depending where your company is on their growth journey. This information, presented in a constructive way, can then motivate the decision to strategically cut the supply base in half over the next 5 years, not for the sake of cutting suppliers, but to deliver strategic value, reduce risk, optimize pricing and innovation with strategic suppliers. This initiative becomes a key responsibility for procurement, and since the initiative is based on an agreed upon strategic metric from the outset, progress can be monitored easily.

Even metrics that track changes over time represent an important opportunity for improvement. Maybe having 3,000 suppliers isn’t a problem, but the current rate of supplier additions means that there will be 4,000 or 5,000 suppliers in 12 to 18 months. If those suppliers are not being added in the right and way for the right reasons, the company has a growing problem looming on the horizon. A single metric is a snapshot in time, and may indicate something meaningful or not, but a trend is something that the business should want to track to ensure it aligns appropriately with their other activity and metrics.

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This is not to say that all metrics are meaningful or that metrics should drive all procurement activity. Anyone that has ever felt frustrated with the pressure to realize “savings” over long term value knows that is true. Sometimes people are overly driven by their metrics, and sometimes the wrong metrics are used to track and assess performance. All measures should come under regular scrutiny, not just for their appropriateness, but as part of a review of the behaviors and decisions they drive, intended or otherwise.

Not all companies have systems in place to automate performance metrics management. Sometimes the work has to be done in spreadsheets and other times it can be pulled from different systems, such as those ‘owned’ by finance and operations. Procurement should use any source of data that helps them prioritize their resources and fuel company growth.

Establishing a basic scorecard in advance and getting executive buy-in on the metrics that will be 
tracked and what they indicate is the best way to be prepared to field tough questions on short 
notice. Not all measures have to be kept up to date at all times especially when the process is 
manual. But a few key metrics about supplier count, new supplier adds by category, payment terms, 
total spend, spend on contract and supplier concentration, should be considered absolutely critical 
and be readily available.

Being able to answer questions and proactively share information with decision-makers and leadership regarding the status of spend and suppliers establishes that procurement is central to business operations. Without that information, procurement – and the company – are literally flying blind.

If you would like to explore how a more deliberate use of metrics can improve your company’s spend, productivity and supplier management efforts, send me a message – I’ll be glad to discuss.