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Performance Measurement and Evaluation

Performance Measurement and Evaluation. Chapter 19. Chapter Overview. Purchasing and supply chain performance measurement and evaluation Purchasing and supply chain performance measurement categories Developing a performance measurement and evaluation system. Chapter Overview.

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Performance Measurement and Evaluation

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  1. Performance Measurement and Evaluation Chapter 19 CENGAGE LEARNING Monczka – Handfield – Giunipero – Patterson

  2. Chapter Overview • Purchasing and supply chain performance measurement and evaluation • Purchasing and supply chain performance measurement categories • Developing a performance measurement and evaluation system Purchasing & Supply Chain Management, 4e

  3. Chapter Overview • Performance benchmarking: comparing against the best • A summary of purchasing measurement and evaluation characteristics Purchasing & Supply Chain Management, 4e

  4. Performance Measurement • Effectiveness – the extent to which, by choosing a certain course of action, management can meet a previously established goal or standard • Efficiency – the relationship between planned and actual sacrifices made to realize a previously established goal or standard Purchasing & Supply Chain Management, 4e

  5. Why Measure Performance? • Support better decision making • Support better communication • Provide performance feedback • Motivate and direct behavior Purchasing & Supply Chain Management, 4e

  6. Problems with Measurement • Too much data and wrong data • Measures that are short-term focused • Lack of detail • Drive the wrong performance • Measures of behavior vs. accomplishments Purchasing & Supply Chain Management, 4e

  7. Integration Elements

  8. Price Performance Measures • How effectively purchasing dollars are spent • Actual price compared to plan • Actual prices to market index • Price comparisons between operations • Target prices achieved Purchasing & Supply Chain Management, 4e

  9. Actual Prices Compared to Plan • On a total aggregated basis • Commodity or product family • Individual item • Project • Buying location or department • Buyer • Management group • Supplier Purchasing & Supply Chain Management, 4e

  10. Actual Prices Compared to Plan Purchasing & Supply Chain Management, 4e

  11. Actual Prices to Market Index Purchasing & Supply Chain Management, 4e

  12. Target Prices Achieved Target price – Profit target = Allowable cost Purchasing & Supply Chain Management, 4e

  13. Cost Effectiveness Measures • Cost changes • Tangible cost reduction achieved from a change in sourcing strategy • Cost avoidance • Price increase that would have occurred without a specific purchasing effort or action • Require manual calculation • Can be subject to interpretation Purchasing & Supply Chain Management, 4e

  14. Revenue Measures • Royalties generated from supplier- or buyer-developed technology and patents driven by purchasing • Supplier contribution as a reason for new business • Return on licensing technology driven by purchasing Purchasing & Supply Chain Management, 4e

  15. Revenue Measures • Number of patents that have lead to royalties • Number of invention disclosure forms files • Number of patents granted • Value of free samples from suppliers Purchasing & Supply Chain Management, 4e

  16. Quality Measures • Parts per million • Customer defects per supplier • Field failure rates by purchase item • Field failure rates by supplier Purchasing & Supply Chain Management, 4e

  17. Time/Delivery/Responsiveness • Time-to-market targets – new product and services • On time delivery/responsiveness • Achieving new product introduction ramp up schedules and introduction dates Purchasing & Supply Chain Management, 4e

  18. Time/Delivery/Responsiveness • Cycle time reductions: order entry, manufacturing/operations, distribution, and logistics • Responsiveness to schedule changes, mix changes, and design or service changes Purchasing & Supply Chain Management, 4e

  19. Technology/Innovation Measures • First insight/production outputs of new supplier technology • Standardization and use of industry standards Purchasing & Supply Chain Management, 4e

  20. Asset and Integrated SCM Measures • Asset-related (inventory) • Transportation cost reduction • Customer orders • E-transactions (# and % of suppliers/ dollars/orders) • Pull systems/shared schedules/ supplier-managed inventory (SMI) Purchasing & Supply Chain Management, 4e

  21. Administration Measures • Current budget plus adjustment • Control ratios • Other approaches • Purchasing workload in/out • Line items processed • Headcount Purchasing & Supply Chain Management, 4e

  22. Government/Social Measures • Minority, women, and small business enterprise objectives • Percentage of spend to total spend • Number of suppliers in each category • Growth of minority, women, and small business enterprise spend Purchasing & Supply Chain Management, 4e

  23. Other Categories of Measures • Internal customer satisfaction measures • Supplier performance measures • Strategic performance measures Purchasing & Supply Chain Management, 4e

  24. Typical Strategic Measures • Proportion of quality-certified suppliers to total suppliers • Total number of suppliers • Supplier lead times indicators • % of purchase dollars committed to long-term contracts • Supplier development costs and benefits Purchasing & Supply Chain Management, 4e

  25. Developing a Measurement System • Determine which performance categories to measure • Develop specific performance measures • Establish performance objectives for each measure • Finalize system details • Implement and review system Purchasing & Supply Chain Management, 4e

  26. Specific Measures • Clarity • Use of accurate and available data • Creativity • Directly related to organizational objectives • Joint participation • Dynamic over time • Not subject to manipulation Purchasing & Supply Chain Management, 4e

  27. Performance Objectives for Each • Historical data • Internal comparison • External analysis Purchasing & Supply Chain Management, 4e

  28. Finalize System Details • Performance-reporting frequency • Education and training • Using system output Purchasing & Supply Chain Management, 4e

  29. Benchmarking Defined • The continuous measuring of products, services, processes, activities, and practices against a firm’s best competitors or those companies recognized as industry of functional leaders Purchasing & Supply Chain Management, 4e

  30. Types of Benchmarking • Strategic benchmarking • Operational benchmarking • Support activity benchmarking Purchasing & Supply Chain Management, 4e

  31. Benefits of Benchmarking • Helps identify the best business or functional practices • Breaks down a reluctance to change • Serves as a source of market intelligence • Creates valuable professional contacts between firms Purchasing & Supply Chain Management, 4e

  32. Critical Success Factors • Must become an accepted process • Must be a permanent part of a system that establishes goals, objectives, and competitive strategies • Must be willing to commit necessary legwork toward data gathering • Detailed and accurate benchmarking data Purchasing & Supply Chain Management, 4e

  33. Information and Data Sources • Trade journals • Internet • Direct contact • Suppliers Purchasing & Supply Chain Management, 4e

  34. Benchmarking Process Purchasing & Supply Chain Management, 4e

  35. Balanced Scorecard • Goes beyond financial measures which are lagging indicators • How do customers see us? (customer) • What must we excel at? (operational) • Can we continue to improve and create value? (innovation) • How do we look to shareholders? (financial) Purchasing & Supply Chain Management, 4e

  36. Measurement System Characteristics • Measurement is not free • Not all aspects of performance lend themselves to quantitative measurement • Purchasing is better served by a few precisely defined and thoroughly understood measures Purchasing & Supply Chain Management, 4e

  37. Measurement System Characteristics • Effective measurement requires a consistent and reliable database • Periodic review of the measurement system to: • Eliminate unimportant or unnecessary measures • Add new measures as required • Reevaluate objectives or targets Purchasing & Supply Chain Management, 4e

  38. Measurement System Characteristics • There is no best way to measure performance • Measurement reporting requirements and content vary by position and level within the organization • A single, overall productivity measure is not feasible Purchasing & Supply Chain Management, 4e

  39. Measurement System Characteristics • Many industries need to shift from operational measures to strategic measures • Strategies and plans used to product a measure’s result are probably more important than the end result itself • A balanced scorecard approach is highly effective Purchasing & Supply Chain Management, 4e

  40. Human Resource Characteristics • A measurement and evaluation system is not a substitute for effective management • An effective system requires communication • Measures must reinforce positive behavior, be linked to the reward system, and not used punitively Purchasing & Supply Chain Management, 4e

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