Using a Structured Model of Purchasing Activities to Benchmark Performance
Eric Evans, M Sc, DMS, FIL, FCIPS
Eric Evans, M Sc, DMS, FIL, FCIPS, Director Performance Diagnostics Ltd, Aylesbury, Great Britain, HP22 5AT, Tel: 44 1296 435892.
82nd Annual International Conference Proceedings - 1997
The Issues: There is considerable evidence to suggest that benchmarking procurement processes can produce significant benefits. Unfortunately, experience shows that process benchmarking studies can take up to eighteen months to produce these benefits. The use of management consultants brings no guarantee of a shortened timescale. Although the use of management consultants can improve the likelihood of success, there are likely to be significant fees to be taken into consideration. What is needed is a tool which will provide an objective assessment of the activities within the purchasing process which will benefit from change, reduce the timescales involved and do so without significant levels of consultancy.
The Opportunity: A methodology has been developed which quickly benchmarks an organisation's purchasing processes against:
- conceptual world class levels of performance,
- management aspirations
- other divisions of an organisation
- best practice within an industry.
The methodology has also been proven to:
- help assess training needs
- suggest modifications to purchasing strategy
- guide recruitment efforts.
One of the spin off benefits which has been proven to be hugely successful is the radar chart which is an output from the process. Rather than a long report at the end of a benchmarking or consulting study, the methodology delivers a one page graphical output which is easy to understand and which encourages senior management understanding of the purchasing process.
Session Objectives: During this session the methodology will be explained. A number of case studies will be used to show the benefits which have been gained from its use.
Benchmarking Options: There are many things which can be easily measured in purchasing. It is not difficult to count or measure things such as number of suppliers, number of orders placed, salary levels, cost of purchasing department etc. The question is; how valuable are these things to a Purchasing Manager? Unfortunately many benchmarking studies focus on these factors, and although they provide "interesting" information, it is nigh on impossible to use this information to directly engineer some form of improvement in purchasing performance.
Similarly, a number of benchmarking studies, focus on aspects such as prices paid for commodities or services. These are considerably more interesting, but usually only marginally more useful. Knowing the spread of prices paid in a marketplace for goods or services may indicate a level of performance but there are so many subsidiary factors which may be hidden. Price differences may be caused by differing levels of purchasing performance but there may be a whole series of other factors which have a more crucial effect. These include volumes, payment terms, other contractual requirements. Price may be a result of when a buyer goes to market; commodities such as pulp, copper, rubber etc move down as frequently as they move up, and these movements are not always predictable.
Getting a handle on inputs to the purchasing process and outputs from the process are, of course, likely to be helpful. Similarly benchmarking these factors may provide some interesting perspectives, but they do not get to the heart of the purchasing process. They are backward looking rather than forward looking. They do not help management to identify the changes needed to improve performance.
The most productive form of benchmarking involves looking at the purchasing process itself.
Process Benchmarking: By looking at the purchasing process itself Purchasing Managers can get behind the inputs and the outputs from purchasing and identify the reasons why prices and other outputs may differ.
Benchmarking the purchasing process involves looking at the way key purchasing activities are carried out and comparing and contrasting with demonstrable excellence within or outside of the industry. The key is to learn from how the results are achieved, rather than simply focus on what the results are.
Use of Psychometric Approaches: In recruiting staff Human Resources staff have long since recognised the need to focus on processes rather than rely on those things that are simple to measure. When recruiting staff it is easy to identify things such as height, weight, previous salary, academic qualifications, etc. The question which must be asked is are they things likely to predict the performance of an applicant once appointed? Clearly the answer is no. HR staff have long since recognised the need to understand the processes which people use when making decisions and carrying out activities which are key. This has led to the development and use of psychometric tests as vehicles to determine the thinking and behavioural processes which guide individual's actions.
The question which we asked some years ago was; "Can psychometric assessment methods be used in a way which is helpful in assessing purchasing processes?" Early discussions with a number of clients led to a methodology being developed and tested, and some significant benefits being achieved. The methodology is based around the principles of psychometric testing being applied to an organisation rather than an individual.
The Purchasing Profile Methodology - The methodology has been proven to be a tool which can be useful in benchmarking, and has a number of supplementary benefits. It involves a series of steps which lead to the comparison of current purchasing practices against a number of benchmark comparators. The methodology splits the purchasing process down into a number of key activities. These include:
- Purchasing Horizons (the source of innovation and new ideas)
- Purchasing Strategy
- Risk Analysis
- Risk Reduction
- Contract Management
- Stock Planning
- Ethical Practices
- Supplier Relationships
- Supply Chain Integration
- Supply Market Research
- Systems and Information
- Purchasing Procedures
- Role Allocation (The way that resources are organised)
- Specification Development
- Standardisation and Variety Reduction
- Negotiation Planning
- Negotiation Scope
- Supplier Recruitment
- Supplier Management
- Quality Management
- Customer Service (The service provided to purchasing's internal customers)
- Purchasing Aggregation
- Price Management
- Cost Management
- Stock Management
For each of the purchasing activities the methodology holds a definition of four level of practice:
World Class (This is the level of practice which has been found in a very small number of world class organisations)
Commercially Capable (The level found in leading organisations which can demonstrate a high level of competence)
Commercially Aware (The level of practice to be found in organisations that are performing to an acceptable level, but no higher)
Innocent (The level of performance found which suggests considerable room for improvement)
The definitions of these levels of performance have been accumulated from three sources:
- From over 250 consulting assignments carried out in Europe, North America and the Far East;
- From a literature search bordering on encyclopaedic proportions
- From a survey of companies in the automotive, electronic and retail industries (which tend to be at the leading edge of purchasing practice)
The process has three main stages which involve the development of an aspiration model, capturing observed practice and then gap analysis.
The Aspiration Model: The first stage in the methodology involves the capture of management aspirations for purchasing. This may seem an unnecessary step; surely everyone aspires to be world class at all aspects of purchasing? The answer is no, and a few examples may make it clear why.
World class information systems are expensive to develop. The move from innocent through commercially aware to capable and then world class is an almost exponential progression. Many organisations are happy to aim for commercially capable.
World class supplier recruitment activities are clearly tending to favour close strategic alliances and joint initiatives. Public sector organisations in Europe are severely constrained by legislation from developing these approaches and have to settle for a commercially capable approach.
The aspiration model is quickly completed by choosing from a number of alternative scenarios and entering the level of performance which is desired onto the software model.
Capturing Observed Practice: This stage involves the use of psychometric tools. A number of individuals with an interest in the process are asked to complete an on-screen questionnaire. The questionnaire includes more than 300 multiple choice questions. We should stress that these questions do not solicit opinions or views. They probe for factual answers based on the way that the process is carried out. As an example, those completing the questionnaire may be asked to answer questions such as:
Does the organisation use open book costing when purchasing?
Are purchasing strategies for major purchases signed off by the most senior level of management within the business?
Does the organisation have a methodology which is used for systematically identifying major procurement risks?
A range of answers are possible, and this helps to provide a spread of levels when charting observed practice against management aspirations and world class levels of performance.
The questionnaire takes between an hour and an hour and an hour to complete and needs to be completed by a range of individuals who are involved in the process. This could include purchasing staff, those with responsibility for specifying the goods or services in question, those with budgetary authority and end users or internal customers.
Gap Analysis: The production of a radar chart (examples will be given in the handouts which accompany the session) helps to visualise the gaps between actual practice and management aspirations and world class levels of performance. The methodology also allows for a comparison between different divisions of the same company, between different commodity teams within the business or with others within the industry.
The very visual nature of the output chart helps to set priorities for change management initiatives.
Case Study 1: Benchmarking the Procurement of Travel Services. In 1995 a major multi-national pharmaceutical company adopted the methodology to benchmark the procurement of a range of commodities and services. One of the services profiled was the procurement of travel. Services procurement is straightforward to do with the methodology. A number of purchasing activities are suppressed because of their irrelevance to the purchase of a service. Things like stock planning and management are simply excluded from the models.
The radar charts produced (included within handout pack) highlighted the need to change price management methods if the benefits achieved by others purchasing travel were to be achieved. They suggested a need to consider a better way of finding and managing travel service providers, to change the basis on which negotiations took place, to be more innovative in the way that procurement was carried out and to consider some of the cost (not price) issues.
Case Study 2: Benchmarking the Procurement of Packaging Materials A manufacturing organisation with factories in more than 50 companies around the world adopted the methodology to test for areas of weakness in its operation. Its use demonstrated to senior management the benefits that it was achieving from the implementation of a new strategy, while at the same time highlighting a number of weaknesses which the new strategy had hidden.
The radar chart for the organisation led to the implementation of refinements to the strategy including a more robust approach to the identification and evaluation of risk. It made a very strong case for a major investment in information systems.
During discussions with senior management, the radar charts were useful in providing a visual interpretation of opportunities for further improvement, and as such helped with the business case for systems development.
Case Study 3: Benchmarking the Procurement of Raw Materials. A consumer electronics group operating in the USA and Europe used the methodology to compare its practices against automotive industry practices. The radar charts highlighted the fact that although there was a strong comparison in price management techniques there was a significant gap in quality management practices and, more importantly, a lack of appreciation of cost management issues in areas like specification development, supply chain management and joint development of new initiatives.
Case Study 4: Novel Uses for the Methodology -- In addition to providing a simple benchmarking tool, the methodology has found other uses.
A manufacturing company in the UK was looking to provide a more strategic direction to its purchasing training programme and decided to apply the methodology to identify the purchasing activities which would lead to real improvement in purchasing performance. The purchasing staff were asked to complete the questionnaire and the analysis was used to develop a tailor made training programme which focused on the areas where improvement would lead to a closing of the gap with management aspirations.
A European financial services company has used the approach when recruiting purchasing staff to identify the approach they would take to purchasing. This led to an appreciation of the strengths and experiences which individuals would bring to the company, and the development needs they would have.
A major utility company used the methodology as a pre-cursor to a full benchmarking study. Rather than benchmark the whole of the procurement process it first of all used the methodology to identify the parts of the procurement process where it was receive greatest benefit from a full scale benchmarking study. Having used the methodology in this way it then set aspiration levels and used the tool to define the way in which it wished to carry out the activities.
Conclusion: The purchasing profile methodology has been found to be useful tool which produces a similar output to a more resource intensive benchmarking study, but in a much less resource intensive way. The approach can generate an output in days rather than months and can be used, not just to diagnose problems, but can also suggest changes in processes which will lead to improvements.
The methodology is capable of being tailored to suit particular requirements in a number of ways:
additional aspects of the purchasing process can be added or removed; the radar output charts can be re-defined to show particular aspects of purchasing. It is very straightforward, for example, to group together aspects of purchasing which impact upon cost, service or risk or to look at the management or support activities which impact upon the way that purchasing is carried out.
The full set of radar charts used in the presentation will be provided as handouts to participants at the conference.