Purchasing Efficiency vs Effectiveness: Millennial Thoughts and Strategic Implications
Alvin J. Williams, Ph.D.
Alvin J. Williams, Ph.D., Chair and Professor of Marketing, University of Southern Mississippi, Hattiesburg, MS 39406, 601/266-4634, firstname.lastname@example.org
85th Annual International Conference Proceedings - 2000
Abstract. Professional purchasers work to enhance overall performance in supply-related areas in particular and the organization in general. Paramount in their quest to improve performance is deftly focusing on both efficiency and effectiveness. While both are critically important, sometimes purchasers must choose the proportion of resources allocated to either efficiency or effectiveness. The effort allocation decision by purchasers is a key success ingredient. The paper focuses on variables influencing the decision and various representative examples.
Introduction. A collage of integrative efforts is required for sustained performance in purchasing. There is no one best route to long-term purchasing success. There is an ever-present struggle to balance efforts to enhance both purchasing efficiency and effectiveness. In the short-run, many purchasers mistake efficiency measures for effectiveness and thus lose sight of strategic initiatives required for prolonged success. The proportionality of the two chosen by management is a function of values, acumen, environment, and situation. How do purchasing professionals reach some degree of optimality in balancing these relevant variables? Given the variety and enormity of variables to juggle to attain and sustain purchasing success, answers are not easily forthcoming. The paper takes historical and futuristic perspectives in addressing key concerns in developing some solutions to this quandary.
Background. Purchasing performance measurement is a daunting task. Yet, it is one of the most important and significant contributions a supply management professional can make. Assessing purchasing performance occupies wide spans on the formal-informal spectrum. Some organizations have structured, sophisticated approaches to determining performance in supply management, while others have a more casual, non-structured approach. Both have some merits and both are plagued by the same critical questions - What to measure? Why it should be measured? Will the results from measurement really impact functional and/or organizational behavior? Quite often assessment of purchasing performance has an inward focus and fails to target adequately the external variables that also impact performance.
This inward vs outward focus on performance assessment is an important distinction and perspective to pursue. In fact, this distinction is one characterization of efficiency vs effectiveness. Typically, efficiency measures are inwardly-focused and effectiveness measures are more outwardly-focused (Hofer and Schendel, 1978). For the most part, environmentally-related changes impact the overall effectiveness of an organization, while internally-oriented changes have a more dominant impact on efficiency. Both efficiency and effectiveness are critical to sustainable competitive supply chain performance. However, is greater attention placed on efficiency measures, rather than effectiveness measures in supply chain management circles? The answer may very well depend upon the level within the purchasing organization or the relative positioning in the supply chain.
Assessing Performance of Purchasing Units. Purchasing performance measurement is an essential success ingredient. Various reasons have been given for measuring purchasing performance, including:
- supporting better decision making;
- improving communication within purchasing and across internal and external partners; providing performance feedback; and
- motivating and directing behavior. (Monzcka, Trent, Handfield, 1998)
All of the above are admirable outcomes of the assessment undertaking in purchasing. However, these outcomes cannot be truly realized if there are not broader and deeper levels of understanding of what purchasing measurement is all about. Progress in purchasing assessment, in part, has been stymied by some of the following problems:
- There is no real universally-accepted definition of purchasing performance or effectiveness.
- A clear lack of formal objectives, measures, or performance standards (in contrast with areas like accounting and manufacturing).
- Characterized by historically inaccurate measures (some are subjective and thus, more prone to inconsistency and variability).
- Varying levels of purchasing responsibility and significance across firms and sometimes within the same organization. (Monzcka, Trent, Handfield, 1998.)
To explicate the purchasing performance evaluation discussion, the Center for Advanced Purchasing Studies prepared a study, spearheaded by Fearon and Bales (1997), to determine what measures are perceived useful by CEOs and CPOs and to establish guidelines for selecting performance measures.
Fearon and Bales gleaned eighty-nine measures of performance in purchasing and categorized them into six key areas:
- Purchase Cost Savings / Avoidance (includes: dollar cost savings resulting from price negotiations, outsourcing, use of EDI, and risk sharing strategies, etc.)
- Managing Supplier Base (includes: time to market, supplier satisfaction, minority-/women-owned suppliers, partnerships, etc.).
- Internal Customer Satisfaction (includes: customer satisfaction survey results, customer complaint resolution, cycle time, etc.)
- Purchasing Cost (includes: purchasing expense as percent of purchased dollars, department budget vs actual expenditures (trend), etc.)
- Resource Utilization (includes: purchase dollars spent on term contracts and blanket orders, inventory dollar value, etc.)
- Other (includes: number of benchmarking visits, number of benchmarking ideas implemented, materials cost vs. sales price of major items, etc.).
All six categories of performance measures represent various options available to enhance purchasing. Are the measures aiming toward greater levels of efficiency or effectiveness? Some of both.
Efficiency or Effectiveness or Does It Matter? In determining what should be measured, purchasers have a wide array of choices. However, the fundamental starting point is some definition of purchasing performance. Von Weele (1984) considered purchasing performance to be the result of both purchasing effectiveness and efficiency. He defined effectiveness as the extent to which, by choosing a certain course of action, a previously established goal or standard can be met. It is the relationship between actual and planned performance. Alternatively, efficiency is defined as the relationship between planned and actual sacrifices made in order to be able to realize a goal previously agreed upon. It is related to the resources/means selected.
The two concepts are different, but akin. Purchasers must recognize the value of each concept and realize their interrelatedness. In a study by von Weele (1984), the position and scope of the purchasing function in the organization will, in part, dictate the measures used for evaluation and assessment. If purchasing is viewed as a somewhat clerical function, the performance measures were more quantitative and administrative in character - more efficiency-oriented. As the strategic significance of purchasing increased, performance measures became more qualitative and judgmental in character - more effectiveness-oriented.
Can these alternative purchasing models be rationalized? Yes, they can be. If organizations have a strategic purchasing bent, their focus is generally more on external variables related to the supply market. Those firms with a more inward directional focus purchasing wise, concentrate on internal factors that tend to be more input/output related. Both perspectives are critical to sustained competitive advantage.
Strategic Cost Management as an Input into Purchasing Performance Measurement. No discussion of purchasing performance measurement is complete without integrating selected aspects of strategic cost management. The tools and approaches used to systematically address cost management issues in purchasing are also useful in providing some assessment function. Ellram (1996) developed a structured approach for applying purchasing cost management tools. In particular, a portion of the research focused on categorizing cost analysis techniques, by simultaneously considering the nature of the buy with the type of relationship sought with the supplier. The results indicated four focal points: cost analysis, continuous improvement, price analysis, and life cycle cost analysis matched with the appropriate tools and techniques. Why is this important in purchasing performance measurement? The importance is connected to the process in which purchasing behavior is conducted. Both process and product assessment outcomes are critical factors in measuring overall purchasing performance.
As firms develop and institute cost containment strategies, it is even more critical that purchasing performance measures be carefully woven into the fabric of the process. Rajagopal and Bernard (1993) investigated various companies' approaches to developing cost containment strategies, identifying their structural fit, and monitoring information for effective decision making. Their conclusion was that cost containment is a viable procurement objective, but there is greater strategic importance in companies where procurement effectiveness is seen as a key to competitive advantage. Thus, effectiveness is once again a key element in overall competitive advantage discussions. Firms such as Honda, Xerox, IBM, and Chrysler have all shown the importance of commitment to comprehensive cost containment strategies ( Nothaft 1999).
Summary and Conclusions. Both efficiency and effectiveness measures in purchasing are critical to long-term success. Purchasers should be careful to not confuse the two concepts and to proportionately balance the energies devoted to each. Not only are these approaches useful in assessing purchasing, but the entire supply chain. As chains become more sophisticated and complex, new and more intricately-tailored means of measuring performance must be devised and implemented.
In comparing efficiency and effectiveness, Peter Drucker stated Ait is more important to do the right things (improve effectiveness) than to do things right (improve efficiency). Thus, if an organization is doing the right things wrong (that is, is effective but not efficient), it can outperform organizations that are doing the wrong things right (that is, are efficient but not effective). (Hofer and Schendel, 1978).
There is no one best set of solutions to the quagmires that plague the performance measurement arena in purchasing. However, at the same time, there is no better endeavor in which to place purchasing efforts and resources than working to strengthen the power of the techniques and perspectives used to enhance overall performance. At this juncture in the evolution of the purchasing discipline, the time is right to move to the next level of thought and sophistication regarding measurement issues. Much of the future success of this field hinges upon the capacity of both academicians and practitioners to develop better and more powerful measures of how well we do what we call purchasing and supply management.
Ellram, Lisa M. "A Structured Method for Applying Purchasing Cost Management Tools". International Journal of Purchasing and Materials Management, January 1996, 11-19.
Fearon, Harold E. and William A. Bales. Measures of Purchasing Effectiveness. Tempe, AZ: Center for Advanced Purchasing Studies, National Association of Purchasing Management, 1997, pp. 9-23.
Hofer, Charles W. and Dan Schendel, Strategy Formulation: Analytical Concepts. St. Paul, Minnesota: West Publishing Company, 1978, pp. 1-11.
Monczka, Robert, Robert Trent, and Robert Handfield. Purchasing and Supply Chain Management. Cincinnati, OH: South-Western College Publishing, 1998, pp. 669-695.
Nothaft, Mark, "A Orchestrating a Successful Cost Management Program." Purchasing Today, October 1999, 33-40.
Rajagopal, Shan and Kenneth N. Bernard, "A Cost Containment Strategies: Challenges for Strategic Purchasing in the 1990s." International Journal of Purchasing and Materials Management, January 1993, 17-23.
Van Weele, Arjan, "A Purchasing Performance Measurement and Evaluation". Journal of Purchasing and Materials Management, Fall 1984, 16-22.