Are your Procurement Operations Goals SMART?

PurchTips edition #457

It is highly recommended that procurement leaders set a few powerful goals!

And not attempt to “boil the ocean” These goals can be general so that tasks roll up to support them. Perhaps this is best illustrated by an example. Many planning experts recommend that three to five goals are a good, manageable number. This does not mean that only three to five items will be attempted all year.

What it means is that there are three to five broad areas to concentrate on and measure.

Some Typical Procurement Department goals may be:

  1. Reduce costs
  2. Improve cycle time
  3. Improve quality
  4. Improve service

Each of these goals should have a target

Examples of targets may be:

  1. Reduce costs – Minimum $2,000,000 per year
  2. Improve cycle time – Minimum 95% on-time delivery
  3. Improve quality – Maximum 5% inspection rejection rate
  4. Improve service – Maximum 25 complaints about suppliers

With goals this general, it is easy to distribute responsibility for contributing to the goals to each staff member.

For examplefive buyers responsible for contributing to the goals. Each buyer can then have her own goals as per the following example:

Buyer #1 – Buys packaging – goal is to save $150,000 per year

Buyer #2 – Buys MRO items (except IT) – goal is to save $500,000 per year

Buyer #3 – Buys outsourced services – goal is to save $500,000 per year

Buyer #4 – Buys raw materials – goal is to save $600,000 per year

Buyer #5 – Buys IT hardware – goal is to save $250,000 per year

Now each of those savings numbers may be broken down further into tasks, such as the MRO buyer saving $80,000 on office supplies and the rest on other categories, but all tasks are tied into a department goal rather than being stand-alone goals. It is much more powerful when buyers’ goals and tasks are tied to the success of the whole department. When coming up with goals, it is helpful to have a baseline for each goal.

A baseline is a measurement of things as they are today in their current state.

This helps ensure that your goals are realistic. It is nice to say that you are targeting 95% on-time delivery, but if you do not realize that you’re only at 60% today, you may be ignoring some of the problems that need to be resolved now. If those problems are not resolved early, you risk not even knowing about them until the end of the year or whenever you do your first measurement of actual performance, and then you will appear to be a failure for not coming close to your own goals.

Therefore, establish a baseline!

One of the most important aspects of a procurement manager’s job is to report to senior management the performance of the purchasing department.

Senior management likes to see metrics reported: statistics that are indicators of performance. Many procurement departments stumble when trying to determine their metrics. The tendency is to select way too many metrics to report. Procurement departments take everything that can be quantified and report it. And that is usually a mistake. Think about watching baseball on television. What “metrics” flash on the screen at the end of the inning? Runs, hits, and errors. Now are those all of the things that could be measured in a baseball game? Certainly not.

So why do not things like average pitch speed, number of stolen bases, and the collective weight of the players flash on the screen?

Two reasons:

  1. Those metrics are not as relevant in giving the viewer an indication of how the game is going
  2. The more metrics that you share, the more difficult it is for the viewer to really understand how the game is going

NLPA recommends that three or four good metrics are the optimal number of metrics to report to senior management:

  • Cost Savings
  • Supplier performance and its effect on the organization
  • Procurement department’s service to its internal customers

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The Future Direction of Procurement & Supply Chain

Procurement and supply chain are fields that have changed tremendously throughout the years. They are much more multi-faceted disciplines than they were even just a few years ago.
If you’re a procurement or supply chain professional and you haven’t adapted to new ways of carrying out your work, the world is passing you by. But it’s not enough to try to get to where procurement and supply chain are today. You must prepare for the future of these important business functions.

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