Companies that focus on strategic sourcing can generate substantial economic value not just by eliminating waste, reducing costs and improving administrative efficiency, but also by building stronger supplier relationships that can make them more competitive, profitable and nimble.
There are many valuable metrics that can help you better assess your company’s performance at the sourcing / procurement level. In this blog post, I discuss the top spend areas of most manufacturing organizations, important measures to analyze in each, and how these measures (or KPIs) can impact the business.
AT A HIGH LEVEL …
Spend can be classified either as direct or indirect. Indirect spend (or things your company buys to support its operations) occurs when there is a need and isn’t generally subject to negotiation for pricing. Indirect spend includes office supplies, healthcare and other insurance, utilities, etc.
Purchases that are incorporated in an organization’s products represent direct spend. This includes raw materials, hardware, subcontracted manufacturing services and other items. Direct spend is a key area of performance to consistently measure because Procurement professionals must understand the impact of their sourcing decisions on both product quality and availability to customers.
Regardless of the direct/indirect area, though, it’s important to understand the percent of total spend that both types represent and be able to break down the metrics. These metrics are noted in the following sections below.
- Influenceable and Managed Spend
Influenceable spend is primarily indirect spend that can change through negotiation, the selection of different suppliers or as a result of changing demand. This spend is an organizational decision that varies between companies and their line-of-business (or department) heads. In many organizations, influenceable spend isn’t handled by the procurement group.
Managed spend, on the other hand, represents the categories and vendors that the procurement team is actively managing on an ongoing basis, often through a contract manager. In order to be considered managed spend, the procurement team should be involved in the letting and/or management of the contract. Most direct spends are managed spends, with visibility and controls in place to ensure that people are guided to the contracted suppliers and use negotiated contract rates.
The key metrics that are generally used to measure performance of both influenceable and managed spends are tied to purchase price and accounts payable. These metrics include:
- An analysis of purchase price variances and how they are affecting your budgets, comparing them across vendors and time periods.
- An analysis of how much is due to your vendors and when, and the value of overdue payments as a percent of total payments due.
- A look at how your payables are trending over time and for which vendors so you can manage your cash commitments and pending payments to your advantage.
- Tracking price increases and why they are occurring to see if you are purchasing more or if your vendors are increasing prices for goods and services.
- An assessment of discounts your vendors have offered for early payments to determine the value of these discounts to your business now and over time, whether or not your business uses them, and to negotiate better terms in the future.
B. Strategic Supply Spend
Strategic supply spend is a combination of your highest-spend suppliers and those you depend upon to deliver products or services to your customers. You should be familiar with the total spend, commodities provided, number of departments buying from the suppliers, and, most importantly, the risk those suppliers pose to your company. These are the suppliers whose performance really matters to the operations, security and reputation of your organization.
For manufacturers, the most important metrics of strategic supplier performance are generally tied to delivery performance, pricing, reject rates and lead times. Some of these metrics include:
- An analysis ofincorrect material quantities, which can affect both production and warehouse operations and customer satisfaction.
- A review of short vendor deliveries, which can impact production schedules and customer shipments.
- An assessment of excessive orders, which can affect warehouse space and carrying costs.
- An analysis of incorrect products and materials delivered by suppliers, which can result in missed production schedules and customer commitments.
- Tracking of vendor pricing, along with accepted and rejected materials by vendor, to identify those suppliers you can count on to deliver product on-time, at the right price and with a low percentage of “bad” product.
- An analysis of vendor lead times in order to minimize late supply deliveries and deliveries received earlier than expected, both which can negatively impact several areas across your supply chain.
Regardless of your particular area of spend, understanding how well you’re performing will allow you to make smarter purchasing decision while mitigating risk. Pre-configured business intelligence solutionsfor analyzing purchasing performanceand the performance of other areas across the enterprise are available to help.
Categorised in: Intelligent Analytics
This post was written by Pat Hennel