2-D-1 Monitor work -against business plans and take action to resolve variances or adjust plans as appropriate
One of the major functions of management is to evaluate and control the performance of an activity. A supply management organization is certainly no exception. The organization leadership team must be able to evaluate overall performance of its organization, departments, individuals and suppliers. Creating meaningful measurements, collecting data and communicating the results are a key role of management. This can be difficult, because there is no one set or collection of metrics that works for all supply management organizations. It is the responsibility of management to create, report, achieve, evaluate and revise the organizational metrics that will assist it in improving its strategic position within the larger organization to meet its corporate objectives.
1) Performance measurement processes - Performance measurement processes are intended to enable clear communication of goals, focus effort and resources around key business objectives. These processes allow clear measurement of results against expectations and frequent review to ensure desired behavior is being reinforced so appropriate actions can be taken to resolve variances as necessary.
A) What to measure -This is determined by the overall business objectives of the organization. What is measured should reinforce the activities and processes to attain these objectives.
Measurements can be broken down into broad categories of performance metrics: financial, operational, information technology, sourcing, business control and relationship.
• Examples of financial metrics:
Total cost reductions -These reflect an effort to lower costs associated with acquiring a particular product or service. (ISM Glossary, 2006.) They demonstrate the value add of the supply management team when purchasing goods or services.
Year to year cost reductions.
Supply management competitive advantage -This is cost reduction measurements that measure (using market intelligence) how well a team is buying versus the competition's organization.
Productivity metrics -These measure total cost of supply management labor versus total organization revenue.
Supply management efficiency -This measures total cost savings to supply management labor expense.
Average payment terms.
• Examples of operational metrics:
Supplier assurance - delivery.
Supplier quality metrics - Field impacts, shipped products quality level, warranty expense.
Contracted labor utilization rates.
• Examples of information technology metrics:
Supplier transaction index -This measures how well the suppliers are connected to the buying organization from an electronic invoicing/p.o. generation, etc.
Total spend - This measures the percentage of spend that is paid via electronic payment.
• Examples of sourcing metrics:
Leverage spending -This is a metric to determine what number of the organization's suppliers makes up 80 percent of the total spend (80/20 rule).
Diversity supplier spending -This is a metric to measure total spend with diversity suppliers.
Supply management social responsibility -This is a measure of the number of initial audits and re-audits, as necessary.
Direct and indirect spend addressed.
New product development participation.
• Examples of business control and relationship metrics:
Internal and external client satisfaction surveys of supply management.
Supplier surveys.
Supplier report cards -This is a survey of internal clients regarding their satisfaction with suppliers.
B) Measurement creation- Measurements/metrics must begin with a view of meeting and exceeding the organization's key strategies and mission statements. Using this as the baseline, then a clear and concise endpoint can be developed for the creation of these measurements.
Supply management objectives must be aligned with, and work in conjunction with, those of the rest of the organization. The integration of objectives ensures success of the vision, mission and goals of the organization. It is imperative that the supply management organization understands its relationship within the larger organization.
Not all objectives should receive the same priority, so it is necessary to first pursue those that have the greatest impact on the operation of the organization. These priorities should be established and communicated throughout the organization to ensure that the objectives and the assigned priorities are valid.
Measurements and personal objectives must flow downward. The senior executive within an organization must start with a set of metrics and then they must have a rational flow down through the organization.
C) Results evaluation (signal versus noise, key stakeholders) - Objectives need to be divided into groups (for example, cost savings and product improvement) that can be quantified and measured. Quantifying the existing situation, and then comparing the situation at some point in the future against historical data or against appropriate external benchmarks is one way to do this. The key to effective measurement is the selection .of elements to measure that focus attention and resources on how and when supply management can add the maximum value to the organization.
D) Key Performance Indicators (KPI) - KPIs are measurements considered critical to the performance of a business or process, usually calculated and reviewed on a regular basis. (ISM Glossary, 2006.) KPIs are quantifiable measurements, agreed to beforehand, that reflect the critical success factors of an organization. They differ depending on the organization.
One approach would be to meet with and review the key metrics of departments that the supply management department supports and then create key performance indicators that will measure results that will meet the goals of the department's key customers. Fundamentally, one of the objectives of supply management is the acquisition of materials and services of the right quality, in the right quantity, at the right price, at the right time and from the right source.
E) Performance management systems (for example, earned value management system (EVMS), balanced scorecard, value stream) -There are many approaches to managing performance. The key is that it should result in buy-in or employee accountability throughout the entire organization. This can be accomplished by developing goals and objectives at the top of the organization and then sharing them downward and ensuring that each individual takes ownership of those metrics. This can be accomplished by including these metrics in the individual's personal performance criteria.
One metric is the earned value management system (EVMS), which is a management system and related sub-systems implemented. to establish a relationship between cost, schedule and technical aspects of a project, measure progress, accumulate actual costs, analyze deviations from plans, forecast completion of events and incorporate changes in a timely manner. (ISM Glossary, 2006.)
Another metric is value stream mapping, which is a lean manufacturing technique in which the transformation of materials is traced from beginning to end to determine if there is waste in the process. Such waste could be in the form of a step where no value is added or a point of "wait time" when material is being stored to await further value adding transformation. This concept may also be applied to services. (ISM Glossary, 2006.)
Scorecard systems for management awareness is one way of monitoring performance. This can be accomplished by setting up a monthly I quarterly review of the key metrics for the organization and then monitoring them based on results. For example, set a scale for each metric and then if the metric is in good shape it is in a green light position and no review is needed. If it is in moderately good shape then it is a yellow light and it might be reviewed by a middle manager. If it is in, bad shape, then it is a red light and it is reviewed by senior management and a corrective action plan is required.
F) Corrective action process - Corrective action is taken to bring a process that has veered off the planned course back on track. (ISM Glossary, 2006.) When performance fails, then it is appropriate to set up corrective action plans. This can be done at all levels of the organization and will depend on the degree of performance failure as to how high a level of management is involved. The process of determining a corrective action requires identification of actions that can be taken to prevent or mitigate the weakness. These are commonly referred to as countermeasures. Effectiveness is generally thought to be improved by addressing the root cause(s) of the problem.
These corrective action plans must be reviewed within the organization as well as with the suppliers. If correction is needed from the supplier, then a formalized process should be implemented with the supplier to again meet the minimum level of performance expectations. These plans should include a timeline for meeting the goals and penalties for not meeting them.