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Purchasing Performance
Measures
By
Steve Lunden, M.B.A., CPSM, C.P.M.
Director of University Purchasing
Gonzaga University
Measuring the performance of any
purchasing department has always
been a difficult task.
“If you can’t measure it, you can’t
manage it.”
Is there an optimal set of metrics or
measures?
Today’s Objectives
Look at Purchasing Performance Measures
from the perspective of:
1. Department level
– How are the individual members doing?
2. Company level
– How is the department doing?
First Considerations:
Whether public or private consider:
• What are your business objectives?
– Use these organizational objectives to
determine the measurements needed.
• Search for measures that match with the
goals.
– Linkage must be established between
objectives and measures.
First Considerations: (cont.)
• Stakeholders must be involved in the
determination of the measures.
• Senior management, the chief purchasing
officer’s (CPO’s) superior, and major
internal customers must be involved.
First Considerations: (cont.)
• Don’t over or under measure. Find the
“right” balance.
• Needs for measures will change.
Today’s measures will differ from what
will be needed tomorrow.
Why measure?
• To determine how the Purchasing Department is
doing
• To quantify cost reductions or avoidance that
allow us to be more competitive
• To determine how individual buyers are doing
• To evaluate the fairness of buyer “loadings”
• To assess the effectiveness of any changes
• To argue for more of the scarce financial assets
What to measure?
• Purchasing is like the black box.
• Purchase requisitions (inputs) go into one
side of the box.
• Purchasing magic happens.
• Goods and services (outputs) come out of
the other side.
Black Box of Purchasing
?
OUTPUT
What to measure?
• Purchasing efficiency
– Performance against administrative budget
• Purchasing effectiveness
– Inventory turnover ratios
– Seasonal requirements may complicate
• Purchasing Functionality
– Right item at the right time at right cost
Inputs
•
•
•
•
•
•
•
Purchase requests
Change requests
Research
Stores/inventory requests
Bids
Special projects
Other specific activities
Outputs
•
•
•
•
•
•
•
Goods
Services
Purchase Orders
Change Orders
Blanket Purchase Orders
Contract Purchase Orders
Authorization for payment
What to measure
• Dollars
• Effort
Measure the Inputs
How many or how much?
•
•
•
•
Purchase requests
Change requests
Research
Stores/inventory
requests
• Bids
• Special projects
• Other specific
activities
• Difficulty rating
Measure the Outputs
How many or how much?
•
•
•
•
•
Goods
Services
Purchase Orders
Change Orders
Authorizations for
payment
•
•
•
•
•
Purchasing card use
Recharges
Releases
New agreements
Difficulty rating
How to measure
• Gather the data (monthly)
– Manual
– MIS
• Caution!!!
“What get measured, gets done.”
What to measure
• Dollars / Financial
– ROI = Return / Investment
– ROA = Return / Assets employed
• Increased Quality
– Production or waste savings
• Purchasing process improvements
– EDI, E-procurement systems, vendor
managed inventory & pay on receipt
• Transportation improvements
What to measure (cont.)
• Spend
Annual spend
Monthly spend
• Savings
Documented savings (hard numbers)
Cost avoidance savings (soft numbers)
What to measure (cont.)
•
•
•
•
•
Cost savings
Vendor quality
Delivery metrics
Price effectiveness
Inventory flow
What to measure (cont.)
Effort
• Transactions
Number of PO
Number of line items
• Service measures
Turnaround time
Percent on time
• Accuracy measures
Rate of returns
Purchasing performance
Key areas of purchasing
performance measurement
Purchasing
effectiveness
Purchasing
Materials costs/
prices
Product / quality
Materials price/cost control
Materials price/cost reduction
Purchasing’s involvement
in new Product development
Purchasing and Total Quality control
Adequate requisitioning
Purchasing logistics
Order and inventory policy
Supplier delivery reliability
Personnel
Purchasing
efficiency
Purchasing
organization
Management
Procedures & policies
Information system
Suggested Measures
•
•
•
•
•
•
•
Total annual spend
Total number of suppliers
Annual spend by commodity
Cost savings per procurement investment
Cost per purchase order
PO per FTE
Line items per FTE
Suggested Measures (cont.)
•
•
•
•
•
•
Error rate
Procure to pay cycle time
Diversity initiative success
Percent of defective items by supplier
Back order ratio by supplier
On time receiving rate
Suggested Measures (cont.)
• Return rate (returns / total line items)
• Cycle time
• Purchase price variance
Target price – Actual cost
• Purchase order variance
Original price – Actual cost
What to do with the measures?
• Make graphs and charts
• Why?
– Because Management loves charts and
graphs.
– Easy method to show activity
– Allows historical comparisons
What to do with the measures? (cont.)
•
•
•
•
•
Look for trends
Present to management
Use consistency
Compare over time
Compare to historical
– Month to month
– Year to year
– Average to average
What to do with the measures? (cont.)
• Argue for more of the scarce assets
Dollars
People
Technology
• Argue for Control
Centralization or decentralization
More / less
• Distributed access (Purchasing cards)
Individual Loadings
• This is the sum of inputs and outputs of an
individual buyer.
• We are attempting to quantify “How busy”
an individual buyer” is comparison
purposes.
• The “difficulty factor” is very subjective.
Departmental Transaction Loading Totals
25000
20000
15000
Total Transactions
10000
5000
0
Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 Period 7 Period 8
ry
ar
ch
ay
be
r
t
De
ce
m
be
r
be
r
No
ve
m
O
ct
ob
er
Se
pt
em
Au
gu
s
Ju
ly
Ju
ne
M
Ap
ril
M
Fe
br
ua
ry
Ja
nu
a
Transactions
Monthly Loading by Buyer
Buyer Loadings
600
500
400
Buyer 1
300
Buyer 2
Buyer 3
Average
200
100
0
Transaction Variance by Buyer
Transaction Variance
100
80
60
20
Buyer 1
0
Buyer 2
-20
Buyer 3
-40
-60
-80
Au
gu
st
Se
pt
em
be
r
O
ct
ob
er
No
ve
m
be
De
r
ce
m
be
r
Ju
ly
Ju
ne
ay
M
Ap
ril
-100
Ja
nu
ar
y
Fe
br
ua
ry
M
ar
ch
Variance
40
Public Sector Nuances to
Performance Measures
• How can the School District determine if
our Purchasing Department is an added
value to the District?
Who gets to Vote on our Worth?
(Stakeholders)
• Internal Customers:
School District Board of Directors
Superintendent’s Cabinet
Budgetary Authorities
Accounting Department Partners
Ultimately the teachers & students
Indicators of Our Added Value
to Internal Customers
• Compliance with Applicable Statutes
• Needed Product/Service received on time
and at right (best) price
• Clean Audits
• High Level of Customer Service
(Personal Buyer Model for big spending
deptarments)
Who else gets to Vote on our
Worth?
• External Customers
Vendors
SW/PW Contractors
Personal Service Providers (using SS#)
Community Collaborative Partners
Performance Measures for
External Customers
• Are we Fair?
• Well written Solicitations, Contracts and
Agreements
• Good overall Communications &
Relationships
• Good Problem Resolution Skills
Department Level Strategy
•
•
•
•
•
•
Reliable
Competent & Knowledgeable
Timely
Helpful
Friendly
Proactive
Staff Level Strategy
•
•
•
•
Hire good people
Provide regular & relevant staff training
Cross train staff (generic job descriptions)
Match assignments to individual’s
interests, experience and aptitude
• Act as a personal buyer in a way that
elicits trust, successful outcomes and
develops enjoyable working relationships
Staff Level Strategy
(Continued)
• Re-allocate work load periodically to:
* Keep work fresh and challenging,
* Allows for cross-training,
* Encourage individuals to explore & grow
in various procurement specialties
Staff Level Strategy
(Continued)
• Stress Team!
*Help out when someone’s overwhelmed
*Sub for the absent as needed
*Challenge each other on public purchasing
law, principals, ethics, etc. when opportunities
arise
*Celebrate together when you can (birthdays,
seasons, significant events) and always with
food 
Helpful Measures of Success
• Built in Accountability to each Transaction
• Weekly briefings reveal buyer productivity,
timeliness, attention to detail, competence
• Director receives feedback from external &
internal customers
• Budget Time – is our department asked to
cut positions in tough economic times?
• Has department grown in scope & duties?
Questions?