3. 3
Back to the basics:
• Keep it simple
• Life is too short, have fun and smile
• Every dollar saved goes straight to Profit and Loss
• Every extra day of negotiated payment terms goes straight to Free Cash Flow
• We need the suppliers as much as they need us as a customer: No suppliers, no business
• General expenses are real expenses and cost money
• Pricing is only one part of the contract
• Supply Chain, Procurement, Purchasing… who cares, you name it: Materials and Services
that cost companies money and can not be performed without a Purchase Order
• Do focus on what you do best: Outsource Non Core activities
• Sales, HR, Payroll and Taxes: Those are “horses of a different color”. There should be
specialized teams to work on those matters better than Supply Chain
Supply Chain: Professional dedicated team which function is to spend
the company´s money to fulfill its needs in the best possible way,
aligned with company´s Mission, Vision and Values
Supply Chain interacts with Sales, Marketing, Finance, Quality, CSR, Environmental, Health and Safety, Risk Management,
Compliance, Legal, Manufacturing, Operations and Maintenance, Internal and External audits, Inventory, Warehousing, IT,
I+D+i, M&A, Investors…
4. 1 Scorecards
2 Why to measure
3 What to measure
4 Procurement KPI’s
Contents
4
5 Maturity of Procurement
Organization
6
Strategic Sourcing:
• Expend analysis
• Category Management
• Supply Base consolidation
6. Scorecards
6
• Managers use Balanced Scorecards to manage the organization and to set up plans to drive day to
day operations towards long term goals and objectives
• Balanced Scorecards are made up of a set of Key Performance Indicators (KPI’s)
• Objective is to define a set of KPI’s applicable to Supply Chain that allow to know the status,
progress and improvements of the organizations
8. 8
“What is not defined can not be measured
What is not measured can not be improved
What is not improved, always gets worse”
William Thomson, Lord Kelvin
1824 – 1907
0º K = -273,15º C (absolute zero)
Define, Measure, Improve
9. 9
KPI’s are simple and results based tools needed to:
• Align day to day behaviors towards defined objectives
• Determine what is working right
• Identify what to improve and adjust based in the results
• Report status of activities inside Supply Chain, report to the rest of
the Management
• Set SMART objectives
• Benchmark: Comparison with other organizations by comparing KPI’s
11. 11
A good set of KPI’s should comprehend holistically
and globally all activities developed by the Supply
Chain Function
A Supply Chain Balanced Scorecard should measure three
core areas of the Supply Chain Function:
1. Value added by the Supply Change to the Organization
(Savings and Free Cash Flow)
2. Stakeholders:
a. Supply Base Portfolio performance
b. Procurement Personnel performance
c. Internal Customer feedback
3.Operational Excellence of the Procurement Processes
14. 14
Core Area KPI Calculated KPI Remarks Formula Units Where
How
Often
1.1.1. Cost Savings Recurrent spend
One off spend
(P2 - P1)*V2 Annual
Budget - PO price
€
€
KPI report
KPI report
Monthly
Monthly
1.1.2. Cost Avoidance Price Increase delay
Opportunistic Buy
Annual Impact
(Budget - PO price)*V
€
€
KPI report
KPI report
Monthly
Monthly
1.1.3. Cash Generation Term improvements
Inventory Sale
@ Oficial Interest rate € KPI report Monthly
1.1.4. Transactional Savings Simplify Backoffice
Proccesses
Avoid / reduce / simplify
workflows, redundancies
€ KPI report Monthly
1.2 Procurement ROI Savings / Procurement Budget Salaries, Gen Exp., Travel
From ERP system
Savings / Procurement
Budget
% Anual
Report
Annually
1.3 Spend per employee
Transactions per employee
Total Spend / No. of
Employees No. Transactions /
No. of Employees
From ERP system Total Spend / Number of
Employees
€ /
Employee
Anual
Report
Annually
1.4 Savings per employee Savings / No. of Employees Salaries, Gen Exp., Travel
From ERP system
Savings / Number of
Employees
€ /
Employee
Anual
Report
Annually
1.5 Managed Spend
% Spend that Procurement
manages
% of Spend competitively
sourced
From ERP system Total Spend/ Sourced
Spend
% Anual
Report
Annually
1.6 Commodity Strategy Maturity Assesment Assesment n. a. Report Anual
Report
Annually
Core Area KPI Calculated KPI Remarks Formula Units Where
How
Often
2.1 Customers Perception Internal Customer
Satisfaction Survey
Group Focus Free text
input Short, simple
questions
n.a. Report Anual
Report
Biannually
(6m)
2.2 Employees Performance Track skills and competencies Training Plan n.a. Anual
Report
Annually
2.3.1. Supplier Quality
Right product / Service
ppm if volume big enough
Quality Incidents tracking
Deffects per Million
n.a.
ppm
No.
SQ Report
SQ Report
Monthly
Monthly
2.3.2. On Time Delivery
Right timing
OTD to promised date
OTD to reschedule date
No. Shipments
ontime / not on time
%
%
SQ Report
SQ Report
Monthly
Monthly
2.3.3. Supplier Rating Score
Stakeholder Feedback
Supplier Survey n.a. Rating SQ Report Biannually
(6m)
Core Area KPI Calculated KPI Remarks Formula Units Where
How
Often
3. Operational
Excellence Process /
Policy / Controls
3.1 Procurement Cycle Time
Measure Effectiveness of
Procurement processes
3.1 Procurement Cycle Time
From ERP system
Average time from PR to
PO
n.a. Days Monthly
Report
Monthly
1.Value Added by
Procurement Function
1.1 Savings
Based on TCO
(Total cost of ownership)
Verified by Finance
Globally agreed and Applied
2. Stakeholders
Customers
Employees
Suppliers
2.3 Suppliers Performance
15. 15
4.1 Value added by Supply Chain: Savings and Free Cash Flow Improvement
Amount of money Supply Chain saves by reducing the Total Cost of Ownership
and
Free Cash Flow generated from negotiating Terms with the suppliers
Measures the purchasing departments contribution to the financial success of the organization
• Recurrent expenses: Price decreases year over year (without change in volumes)
• Spot buys / services: “One off” supplies and services compared to budgeted cost
• Cost Avoidances: i.e. Repair vs replace, Spare pools, Opportunistic Buy…
• Cash flow improvements (Calculated at real interest rate)
These actions should be tracked as Profit and Loss: Hard Savings
• Transactional cost savings: Measured as estimated savings when an initiative avoids /
reduces / simplifies processes, redundancies or administrative tasks
These Soft Savings will turn into hard savings over time,
• Avoid RFQs (Frame agreements), Bundle PO´s, Optimize (Reduce) Suppliers
16. 4.1 (Cont.) Value added by Supply Chain: Savings and Free Cash Flow Improvement
• Payback of Supply Chain Cost
Measured in terms of Savings generated / Operational Budget
It benchmark and set goals in terms of Payback and Compliance to Approved Operational Budget
• Spend per Employee
Total Spend / Number of Employees
To design the right size of the Supply Chain organization
• Savings per Employee
Total Savings / Number of Employees
To compare the organization inside and outside the enterprise
• Managed Spend
% Spend that Procurement manages / Total Spend
Measures how effective the function controls and manage the spend
• Supply Chain Maturity Assessment. See Chapter 616
17. 17
4.2 Stakeholders: Customers, Employees, Suppliers
• Customers Perception
Internal customer satisfaction survey
Group Focus Weighted by users. Free text input. Short, simple questions
Cons: Perceptions are never measurable. Need to be supported by measurable data
• Employees Performance
Record skills and competencies via Training Plan
• Suppliers Performance
• Supplier Quality: Right product / Service measured in ppm if volume big enough.
Quality Incidents tracking
• On Time Delivery : Right timing. OTD to promised date/OTD to reschedule date.
Measured as % of on time of total shipments
Services: Project management: Measured as % of execution to plan / milestones.
Suitable to Turn key projects
• Supplier Rating Score: Stakeholder Feedback. Supplier Rating
18. 18
4.3 Operational Excellence:
Procurement Cycle Time
Measure Effectiveness of Procurement processes
Average time between requisition submission and purchase order placement
Average time from the beginning of a sourcing process to signing of contract
From ERP systems:
Procurement Cycle Time = PR approval avg time + PO issuing avg time + PO approval avg time
PR: Purchase Requisition
PO: Purchase Order
Calculation may differs among different Procurement Organizations
Useful: Plot histograms and analyze out of trend plot causes
20. 20
(-)ValueCapture(+)
(-) Maturity of the Organization (+)
Reck and Long, ISM, 1988
1.- Passive
Everybody purchase
Ad–hoc Chaotic
Savings
3% - 5%
2.- Purchasing
Processes. Procedures. Main
Suppliers Evaluation
Cost Improvements
8% -12%
3.- Sourcing
Expend Analysis, SRM,
Category Management
Capture Productivity
4.- Resources
Supplier integration in Value
Generation
Top Line Impact
Capture Innovation
5.- Value Chain
Overlapping Value Chains
Extended Enterprise
Supply Chain Organization Maturity Assessment
Maturity
Sophistication
Professionalism
Multifunctional
Contribution to
results
How mature is your Supply Chain Organization?
21. 21
Opportunities Identification
In less mature organizations:
Bigger potential savings…
• Supply Chain function not clear “everybody purchase”
• High number of suppliers and families per buyer
• Buyers do other things (logistics, meetings, proyect managent,
chase approvals, suppliers audits). Back-office tasks. No time
to save money or Improve Cash Flow
• High level of purchases through distributors instead of from
Original Equipment Manufacturers (OEM)
• Low level of international purchases
• Low influence of Supply Chain in Supplier selection
24. 24
6.1 Strategic Sourcing: Expend Analysis 7 Steps
1.- Identify all possible
sources of information about
expend:
ERP PO´s, BI Analysis,
Control and Reporting,
Invoicing vs Order, From
different departments and
OU´s, Warehouse outputs
($)…
2.- Gather and
consolidate all data (Core
file) Challenging task:
Data may come from
different sources,
languages, currencies…
3.- Cleanse the data:
Find and Fix
Examples: Fees, Intra
company Costs, Wrong
Names, Construction Costs,
Standardize data for and
easy to use access (Pivot
Tables) Core File
4.- Group Suppliers,
Mothers, Sisters
companies, find Name
changes , M&A’s …
5.- Categorize: Classify
expend by family, category,
subcategory, purchasing
group, etc.
Need to be able to see
where the money goes to:
Office supplies, travel,
marketing, direct and
indirect expenses, Opex
and Capex...
6.- Analyze the
expend:
Make sure that all
negotiated contracts are
best in nclass and
performing.
Buy from preferred
suppliers
Optimize (reduce) number
of suppliers per family…
7.- Repeat:
Running an Expend Analysis
means also to start identifying
saving opportunities.
It is absolutely needed
constantly to update the data,
check that contracts are in
place and performing, preferred
suppliers are used and identify
new saving opportunities
25. 25
6.2 Strategic Sourcing: Category Management
BottomlineImpact
Profit&Loss
Highexpense(€)
(Costsusmoney)
Supply Chain Risk
(Can stop our business)
i. e. Plane on Ground or Unplanned Plant stoppage
Strategic
Selling Power
Bottlenecks
Bottlenecks
Leverages
Purchasing power
Non Criticals
Commodities
Few
Suppliers
Many
Suppliers
Segmentation of Suppliers / Categories
Kraljic Matrix (Boston Consulting Group):
26. 26
6.2 Strategic Sourcing: Category Management
Supply Chain Risk
Strategic
Selling Power
Bottlenecks
Bottlenecks
Leverages
Purchasing power
Non Criticals
Commodities
1.- Keep
Alliances 2.- Accept
Alliances
3.- Break
Relationship
4.- Accept
Dependence
5.- Reduce
Dependence
Reduce
Risks
Change Spec.
Or Supplier
6.- Leverage
Purchasing Power
7.- Develop
Long Term
Alliance
8.- Group
Suppliers
9.- Optimize
Back-office
Kraljic Matrix (Boston Consulting Group):
Segmentation of Suppliers / Categories
<<
BottomlineImpact
Profit&Loss
Highexpense(€)
(Costsusmoney)
Supply Chain Risk
(Can stop our business)
i. e. Plane on Ground or Unplanned Plant stoppage
27. 27
6.3 Strategic Sourcing: Supply Base Consolidation
Pareto Principle: “Trivial Many, Crucial Few”
• Percent of active suppliers accounting for 80%* of total spend.
• This KPI measures the current state of supplier consolidation
and activity within supply base from the previous year.
• New product introductions and M&A (Mergers and Adquisitions)
may impact this KPI. Changes in sales within the product
portfolio may have an effect as well
• This KPI drives efficiencies within the Supply Chain organization
and drives down costs/PO
*: 80% is just an example, but it is generally accepted the 80/20 rule
28. 28
6.3 Strategic Sourcing: Supply Base Consolidation
• Pareto Analysis
Here is where
money $ goes
Here goes the
Non Value Added
effort $$$ Waste
Toyota MC Europe Quality Director and Paco RdM :
“I don´t know how many suppliers you have but I am sure they are too many…”