Looking at the Future of Supply Measurement
As the business environment becomes more global and complex, solid purchasing and supply measures take on a new level of strategic importance.
By Phillip J. Carter, Robert M. Monczka, and Trish Mosconi -- Supply Chain Management Review, 12/1/2005
The following are predictions about the future of purchasing and supply measurement. These predictions are based on interviews conducted for a study by CAPS: Center for Strategic Supply Research titled “Strategic Performance Measurement for Purchasing and Supply,” interviews conducted at countless other organizations, and on the observations of the research team over the course of several years.
Purchasing and supply measures will grow in strategic importance.Three fundamental reasons are behind the projected growth:
1. Global competition, leading to pressure to reduce costs and increase outsourcing, contributes to the growing strategic importance of purchasing and supply. Executive management needs measures that accurately reflect the performance and contribution to company competitiveness of this strategic activity.
2. Executive management of large complex organizations depend on measures that help them “see through” the complexity to make accurate assessments and correct decisions. Executives will need strategic purchasing and supply metrics to help set the vision and strategy for their companies.3. As companies push for financial and operational performance improvements, they will expect purchasing and supply to make substantive contributions to the improvements. Metrics will be required to judge the magnitude of the contribution overall, by SBU (strategic business unit), and by product/service line.
Purchasing and supply measurements will be developed that roll up to strategic financial measures.
Purchasing/supply measures must connect and be aligned with the other strategic measures of the firm. The most important common denominator tying all areas of the firm together is financial measures, which include ROI, ROA, RONA, and EVA. Historically, purchasing/supply performance has included cost measures. In the future, more asset management and revenue enhancement measures will be developed that demonstrate the contribution of purchasing and supply to these areas.
Purchasing and supply strategic metrics will be reported to financial analysts.
The contribution of purchasing/supply to company performance is increasingly highlighted in reports to financial analysts. The Sarbanes-Oxley Act requires that companies audit and accurately report on processes and outcomes. Together, these developments will drive companies to institute additional measures that accurately and reliably reflect the contributions of purchasing and supply and suppliers to projected cost reductions, asset management, and revenue growth.
Many companies have implemented balanced scorecards at the executive level to bring rigor, focus, and balance to strategic measurements. The same motivations will drive the use of the balanced scorecard at the purchasing and supply level of the organization. The many operational and strategic measures in purchasing and supply cannot be melded into a few financial measures. The trade-offs between competing activities and priorities must be made somewhat subjectively by CPOs and directors. A balanced scorecard helps to frame these trade-offs in a comprehensive and repeatable way.
External validation of the purchasing and supply measurement system will increase.
Many companies now use internal auditors, both within and external to the purchasing and supply organization, to validate cost savings and other performance results. Some companies have embedded finance personnel into purchasing to validate results. Longer term, validation of purchasing and supply results will become a routine task for the external (outside of the firm) auditors.
Enhanced and broader purchasing and supply measures will be implemented.
Experienced managers know that purchasing activities based on narrowly defined measures can result in problems for other parts of the organization. For example, pursuing “hard cost savings” on piece price for a direct item can have a detrimental effect on manufacturing efficiency or asset utilization. However, companies struggle with defining measures that broadly encompass several areas of activity and results. Measures of value and total cost, while much discussed, are rarely seen in practice. Nonetheless, companies continue to work on such measures. As information systems and cost models improve, measures that are more reflective of total cost and value will emerge. Continued...
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