Working with procurement teams over the years, I am still amazed at the lack of focus in the area of supplier performance metrics. Many of the mid-cap and small businesses fail to manage suppliers at all and have limited key performance indicators (KPIs). When pushed to discuss supplier metrics, the response is normally “we measure cost, delivery and quality.” Further investigation almost always reveals vague, inconsistent and inaccurate measurement processes.
When developing KPIs, you must assure the metrics are consistent, meaningful and focused on performance improvement. Cost, quality and on-time in-full delivery performance are critical and must be specific and accurately measured, but these metrics are equally important and often over looked:
- Speed of response
- Disaster recovery plans and risk management processes
- Innovation delivery and capture
- Supply chain mapping and integration
- Business plan alignment
- Continuous process, cost and business improvement
Key Performance Indicators are:
- Quantifiable/measureable and actionable
- Measurements critical to the success of the organization
- Tied to business goals and targets
- Applied consistently throughout the company
Key Performance Indicators are not:
- Metrics that are vague or unclear
- “Nice-to-knows” or metrics that are not actionable
- Reports (e.g., top search engines, top keywords)
- Exhaustive set of metrics
Driving metrics that enhance performance is the responsibility and accountability of the sourcing and procurement professional. As we have evolved our profession, it’s now necessary to evolve our metrics to enhance relationships, improve supplier and add value metrics to our businesses.
Are you measuring value delivery?
There is little doubt that our customers and CEOs are demanding more value from our suppliers and supply chains. Andrew Bartolini, Managing Partner and Chief Research Officer at Ardent Partners, has found “In 2016, Chief Procurement Officers (CPOs) will seek to extract and deliver more value from their departments than ever before as they attempt to stretch the limits of their organizations while also maximizing the relationships they have developed with suppliers and internal stakeholders.” It’s an understatement to say that this is a difficult challenge.
CPOs are now expected to design and build a network of suppliers that align to the company’s business objectives, provide innovation, speed to market, agility, flexibility and complexity reduction. To do this, suppliers must be open to integrate business systems with automated source to pay capability, make investments and meet robust performance standards. This is a very different relationship than the traditional model of leveraging suppliers for price. Savvy leaders know that suppliers can only impact margins for the short term. They need healthy margins to reinvest, innovate and compete. The real opportunity is to impact the hidden costs often overlooked by inefficiency, productivity, waste, which can be addressed through the supply chain integration.
Clearly, the days of managing just at the tier 1 level are over and the requirement to architect and design a lean, competitive, well-financed network of suppliers must become a core competency of CPOs today. This requires a relational skillset, strong influencing skills, trust, full transparency and the development of a strong, well-defined and coordinated supplier relationship management program.
The CPO Rising 2016 summit March 29-30 provides an excellent opportunity to network and learn more about how CPOs can deliver the value expectations they face. I hope to see you there.
Are you up to the challenge?
With the PowerBall frenzy of a $1.5+ billion prize, many of us are thinking of what we would do with the winnings. While winning this big prize will certainly give one leverage with the swarms of financial advisors and others seeking investment, even those of us who enjoy planning our investments and playing the market will need to rely on suppliers to manage and meet our goals if we win the big prize. If you want to break into a market or develop that next “can’t live without it” product or make life better for a community, you need to rely on suppliers. The kind of customer you are determines your outcome. For businesses, regardless of size, the value you need to capture a market doesn’t just come from inside the organization.
Many of us have been exposed to a management philosophy that suppliers are a source of incremental profit. Nothing can be further from the truth; a continuous focus on reducing price gives a false sense of security as companies meet short term cost reduction goals. Many buyers are happy that their suppliers are reducing margins, but lose sight of the fact that suppliers need sustainable margins to reinvest in the business, innovate, automate and drive to be the low cost producers. The astute business person knows that the larger opportunity for their company is in the value from the suppliers.
Value can come in many forms and the opportunities that arise truly provide sourcing professionals, and the organizations they represent, competitive advantage. A few examples are:
- Achieving Speed to Market
- Supplier investment
- Product improvement
- Process improvement
- Complexity reduction
- Systems integration
- Shared risk
- Shared resources
- Market intelligence
- Lowest cost manufacturing
- Financing Capital
- Market exclusivity
- Joint design
The skillset required to capture the value opportunity goes far beyond the tactical skills required when applying competitive leverage and price pressure. It requires strategic thinking, planning and execution skills. It also requires team members who are trustworthy, reliable and analytical with strong influencing skills.
Whether your organization is first in a market or captures a market with innovation and exclusive rights to technology, these benefits far outweigh the few dollars captured in the short term with price reduction. Steve Jobs understood the value proposition when Apple launched the first smart phone; do you think suppliers viewed Apple as a good customer?
Price or value? How you reach new heights is your choice!
The market destroys companies that fail to deliver value!
Business success is the result of superior performance of a product with extraordinary levels of service and compelling emotional value sold at the most leveraged price. Without fully understanding the supply chain, value proposition and markets, this cannot occur. Executives in most industries are adapting to shorter product life cycles, rapid commoditization of once differentiated products and weakening of prices by customers with leverage. The strategies and operational initiatives that delivered value last year are losing their impact today.
What does it take to acquire and deliver value? In my experience, the conditions for success are:
- The business and supply chain are aligned to deliver superior customer value.
- Knowledge and capability exists internally (in the company) and externally (in the supply chain).
- The focus is on products where only a small fraction of the value is being deployed (thus making it a prime target for renewal development and leverage).
- Value must meet customer needs, stakeholder needs and shareholder needs.
- Value must be defined, which requires a detailed understanding of the relationship between price and functionality of products and services.
- The total organization and supply chain must buy in to the value strategy.
The combination of functionality of product or service offered to the customer (the value of utility), the price they will pay and the emotional impact (the value of esteem) results in true value. It is inevitable that companies will need to integrate and align the supply chain to meet business objectives and achieve success.
What are the six steps to achieve these conditions for success in value optimization?
- Assemble expert teams to define future markets for their products and services and develop plans to dominate them.
- Define strategies based on differentiation, innovation and cost leadership.
- Assess the strategic capabilities that need to be resourced, developed, protected and leveraged ahead of competition.
- Exploit the market value of intellectual capital.
- Invest in developing internal teams and strategic supply chain partners.
- Define and extract value.
When looking to suppliers to acquire and enhance your product’s value, it’s important to understand that acquiring and delivering supplier value does not rest solely on the procurement or supply chain teams; it is a business-wide process. Without a forward business strategy, investment, alignment and business-wide participation, value will not be optimized for your company, your suppliers or your customers.
How will you ready your company for the challenge ahead?