Commercial companies often struggle with reliable purchasing performance measurement: who actually is the best buyer?

Answer: in practice, the most successful buyer is often seen as the one who presents himself best. This means that there is little difference with a salesperson or account manager. However, in order to be able to assess procurement performance honestly, you will need to measure performance not only subjectively, but also objectively. And that is not exactly easy. But it can be done!

When I was little, I wrote a thesis on procurement performance measurement for Nevi II. The conclusions are still topical:

  1. Reliable measurement only works with not too many criteria: only measure things that are really relevant for the company and its customers.
  2. There are very few good, reliable methods for performance measurement

Complex world

First a strong disclaimer: external developments and circumstances are not only unpredictable, but can also have a huge impact on a (purchasing) performance. It is a nice challenge to budget what your spend will be at the end of next year and how much you will have saved by then. But in all honesty, how much influence can a buyer really exert on this?

If the market leader takes over number two in the market, if a supplier goes bankrupt, if your company  gets a new customer and your volume grows significantly, if there is a global crisis …. These are all conditions whose impact will be many times greater than your negotiating skills. By the way, it is a profession in its own right to translate these kinds of unexpected circumstances into purchasing advantages. Or even better, to have your contracts prepared in such a way that market changes automatically lead to predetermined improvements.

commodity prices
Source: What’s The Price

Ad 2. Everything is getting more expensive. As soon as you start growing you achieve efficiency and the costs per unit decrease. If you’re not growing, you have an entirely different problem. Besides, professional companies are able to learn and do things more smartly. Employees have one more day of experience after each work day and if you happen to make a mistake, you can prevent that later. Besides that, the exchange rate of commodities is rather relevant. As a general rule, within a manufacturing company between 40% and 60% of the cost price is determined by (purchasing of) materials. But these prices sometimes increase and sometimes decrease. Who will say? You don’t even need to be a good purchaser to decrease costs or, as we like to call it, earn money.
A numeric example. Imagine you’re purchasing duvet covers under the following conditions:

  • price € 10
  • volume 100.000
  • guaranteed 1 year
  • increase 1-1 + 3%
  • Growth + 10%
  • commodities -/- 2%

In 3 years’ time you will pay €3,406,080 in total and on average €10.32 for a duvet. But if you approach this fact based and you put the changes to your advantage, the growth will give you an advantage because of the larger coverage on fixed costs, then you’re not going to pay those random price increases of 3% and are entitled to a part of the 2% decrease in commodity costs. And the time that you didn’t have access to all this information is long gone, isn’t it? In this example you would pay an average of €9.59 in 3 years, and that is 7% less! The total over 3 years is then 3,163,282 and no less than €242,000 lower than in traditional purchasing. You shouldn’t make a deal with the supplier who happens to give you the best offer, but with the supplier with whom you think you can negotiate best (and most honestly).

purchase performance

Source: What’s The Price

Supplier performance is your performance

The above assessment focuses on price and margins. For a balanced assesment you should combine this with elements other than price. You can link the results of your supplier assessment to the responsible buyer, who is ultimately responsible for the performance of your own suppliers. A good supplier assessment consists of objective and subjective assessments.

Objective criteria often are delivery reliability, product quality, environmental standards and efficiency within the process, such as correct data transfer and correct invoicing. But don’t forget to assess the softer elements as well: relationship with the supplier, proactivity, innovative capacity and responsiveness. In doing so, avoid that only the buyer judges; colleagues from other disciplines also have an opinion about the performance of a supplier. By weighing this feedback correctly, you make a balanced assessment. Indirectly, the buyer is then also assessed by colleagues via the supplier’s performance. By taking all these factors into account, financial AND qualitative performance are assessed.

vendor rating

Source: Vendor Rating Solutions

Finally, if you don’t asses based the static figures alone, but look especially at the developments within the performance, then you have a wonderful tool to guide and reward.

I myself believe less in tight KPI’s but more in the impact that an individual has within a certain situation. Has the buyer, considering the circumstances, done everything possible to close an optimal deal and improved performance and has the personal effort led to a better result than the competitor has.

During my days at Superunie, the CPO, used to say; “An excellent buyer lies awake, the night after closing a deal, because he doubts whether or not he closed the best deal possible. The day after he would have to get up and have either the unrest or the eagerness to start the deal back up again. That’s what makes a good buyer.

Finally: the golden tip for every seller: Help the buyer achieve his/her internal targets!

If you want to get a feeling how the costs in your industry are developing, don’t hesitate to send me an email: r.driessen@whatstheprice.com