Measuring Purchasing Performance THE PROGRAMME: WEEK 9 Reminder: 2 WEEKS STUDY & REVISION OVERVIEW CHAPTER INTROS AND SUMMARIES Effective Negotiation
Welcome to Measuring Purchasing Performance What do we want from our Suppliers? We want Security/guarantee of supply throughout life of contract & beyond Effective Negotiation
Welcome to Measuring Purchasing Performance To reduce the risk of non- supply buying departments carry out research and performance measurement of both new and existing suppliers Effective Negotiation
Welcome to Measuring Purchasing Performance There are a number of performance tools and techniques that measure performance Effective Negotiation
Welcome to Measuring Purchasing Performance Tools such as Ratios (Pareto), Supplier Segmentation/Tiering Benchmarking, Vendor Rating Balanced Scorecard Standards (ISOs) Matrices PQQs Effective Negotiation
Measuring Purchasing Performance Over last few weeks we have reviewed: Common Financial Ratios & Exam Practice Effective Negotiation
Measuring Purchasing Performance FINANCIAL RATIOS Key Learning: 1. What do we want to measure? 2. What Formula should we use? Effective Negotiation
Measuring Purchasing Performance FINANCIAL RATIOS What do we want to know? Example: We want to know if the supplier can meet their bills. Is the cash flowing in more than the cash flowing out? Effective Negotiation
Measuring Purchasing Performance What financial ratio will tell us this? The Current Ratio CURRENT ASSETS CURRENT RATIO = ___________________ (1:1) CURRENT LIABILITIES NB: Includes Stock. Alternative is ACID Ratio which does not include stock. Stock being an asset which if sold to pay off debt would mean nothing left to sell to bring in cash. Effective Negotiation
Measuring Purchasing Performance LAST WEEK Vendor Rating (1) Segregating Suppliers Different Relationship styles & KPIs for different quadrants Effective Negotiation
Measuring Purchasing Performance Using a 2x2 box matrix suppliers place buyers into one of the 4 quadrants. This tool is known as: Supplier Preferencing Model Effective Negotiation
Measuring Purchasing Performance Not all Buyers are treated the same Effective Negotiation
Measuring Purchasing Performance Supplier Preferencing Attractiveness of Account High High develop core a t nuisance exploitable A C Low High Relative Value of Account £ Effective Negotiation
Measuring Purchasing Performance Using a 2x2 box matrix buyers place suppliers into one of the 4 quadrants. This tool is known as: The Kraljic Matrix, it has many variations Effective Negotiation
Measuring Purchasing Performance We can use Kraljic matrix to segregate our suppliers. Not all suppliers are treated the same Effective Negotiation
Measuring Purchasing Performance Segregating Suppliers Effective Negotiation
Measuring Purchasing Performance By segregating our suppliers we can decide what relationship style should be adopted for each quadrant Effective Negotiation
Measuring Purchasing Performance By segregating our suppliers we can choose the right objectives & KPIs for each of the 4 different groups of suppliers Effective Negotiation
Measuring Purchasing Performance Time Management-Suppliers Effective Negotiation
Measuring Purchasing Performance How should the buying department divide up its time between suppliers in the four different quadrants ? Effective Negotiation
Measuring Purchasing Performance The "critical" suppliers in the top right quadrant ( strategic ) are the ones on which purchasing should spend most time, e.g. 70% . Effective Negotiation
Measuring Purchasing Performance are likely to be no more than 10% of your total suppliers. These suppliers will account for a significant proportion of your purchasing spend (could be > 80% ) . They will also have most affect on your business Effective Negotiation
Measuring Purchasing Performance Therefore 70% of buying department‟s time should be spent with just 10% of its suppliers which are ( strategic ). Effective Negotiation
Measuring Purchasing Performance split suppliers into 'tiers' as follows: A or First Tier: Preferred strategic suppliers capable of managing lower tiers. B or Second Tier: Daily managed by and supplier of components to the first tier. Prudent to be approved and chosen by your purchasing organisation Effective Negotiation
Measuring Purchasing Performance split suppliers into 'tiers' as follows: C or Third Tier (tiertiary): suppliers receive subcontracted work from the first/second tier and/or providing simple low-value products and services direct to your organisation. Effective Negotiation
Measuring Purchasing Performance The supplier segmentation and supplier tiering support: Planning a supplier rationalisation programme Ensure right number of suppliers in each of the 4 quadrants Prevents deletion of possible critical suppliers Effective Negotiation
Measuring Purchasing Performance Supplier Performance Measurement Tools Three categories 1. Systems & Info 2. Measurement 3. Management Effective Negotiation
Measuring Purchasing Performance • Supplier Performance: PROCESS • Tool Box – When to use I) Organisation viability II) Prior to Contract III) Post Contract Effective Negotiation
Measuring Purchasing Performance Supplier Performance Tools - When to Use I) TO PROVIDE THE BEST OPPORTUNITY FOR ORGANISATION SUSTAINABLE BUSINESS II) TO GAIN MARKET KNOWLEDGE AND SOURCE NEW SUPPLIERS III) TO MANAGE GOODS OR SERVICES OVER LIFE OF SUPPLIER RELATIONSHIP/ CONTRACT/FRAMEWORK, ETC.). Effective Negotiation
Welcome to Measuring Purchasing Performance There are a number of performance tools and techniques that measure supplier performance Effective Negotiation
Measuring Purchasing Performance Performance Measurement Tools For example: Balanced Scorecard Vendor Rating Benchmarking Effective Negotiation
Measuring Purchasing Performance Performance Measurement Tools Balanced Scorecard Looks at both the Business Strategy for financial sustainability plus its Vision to satisfy customers, shareholders & stakeholders Effective Negotiation
Kaplan & Norton – Balanced Scorecard Effective Negotiation
Measuring Purchasing Performance Organisation Vision & Strategy Balanced scorecard - Financial To succeed financially, how should we appear to our shareholders? Effective Negotiation
Measuring Purchasing Performance Organisation Vision & Strategy Balanced scorecard - Financial In isolation could result in shareholder needs dominating to detriment of quality, whole-life costing and customer/ stakeholder satisfaction, Balance is addressed by including qualitative as well as quantitative measures Effective Negotiation
Measuring Purchasing Performance Organisation Vision & Strategy Balanced scorecard – Internal Business Processes To satisfy our shareholders and customers, what business processes must we excel at? Balancing shareholder and customer needs Effective Negotiation
Measuring Purchasing Performance Organisation Vision & Strategy Balanced scorecard – Learning and Growth To achieve our vision, how will we sustain our ability to change and improve? Balance shareholder, customer and organisation needs Effective Negotiation
Measuring Purchasing Performance Organisation Vision & Strategy Balanced scorecard - Customer To achieve our vision, how should we appear to our customers? Balance shareholder, customer and organisation needs from the customer‟s perspective Effective Negotiation
Measuring Purchasing Performance Performance Measurement Tools Balanced Scorecard Can support an organisation to choose the right supplier performance measures that will align their business vision and strategy Effective Negotiation
Measuring Purchasing Performance Performance Measurement Tools Vendor Rating Ensuring the supplier is delivering against SLAs & KPIs Effective Negotiation
Measuring Purchasing Performance Performance Measurement Tools Vendor Rating Developing the vendors to reduce cost, to improve performance and to affect growth by diversification and expansion. Effective Negotiation
Measuring Purchasing Performance Performance Measurement Tools Vendor Rating Buyers can measure using simple checks to complex computerised assessment systems. Effective Negotiation
Measuring Purchasing Performance Performance Measurement Tools Vendor Rating Measurement style will be based on what quandrant the supplier sits within the Kraljic matrix. Effective Negotiation
Measuring Purchasing Performance Performance Measurement Tools Vendor Rating 5 Common Checks? Effective Negotiation
Measuring Purchasing Performance Performance Measurement Tools Vendor Rating: Review 1. Quality _ right 1 st time deliveries 2. Delivery _ to schedule 3. Cost/Price 4. Capability – Know-how 5. Service – Key personnel Effective Negotiation
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