There are many performance measures that can be considered when managing the performance of your buyers: cost saving, cost avoidance, quality, contract compliance, off-contract expenditure, management of procurement cycle times, procurement ROI, and many more. Those of you running SAP may have many sets of complex measures that tie into supplier performance management. These measures are necessary, but in the interests of simplicity there are two straightforward measures that are a good departure point for managing buyer’s and supplier’s day-to-day operational performance: on-time and in-full. In this month’s SmartProcurement, Steven Freemantle of SweetThorn Thought Leadership asks: “do you get exactly what you want when you need it?”
It is worth noting that SAP has a standard set of reports to measure these two key performance indicators (KPIs). But in my experience many companies do not use these reports – in fact more often than not the reports are not even ‘switched-on’ (for want of a better term).
In companies that do use these reports I mostly find that the on-time and in-full measures are configured to allow for buffers: a little early or late is considered on-time, or a little over or under is considered in full – this cannot possibly be considered a true reflection of good supplier delivery reliability. If set up properly, these reports will give an indication of when a supplier delivers exactly on-time, early or late. A similar report will show if the required quantities are delivered exactly in full, short or over.
While these reports show supplier performance, I believe that buyers need to hold suppliers to their delivery promises and, therefore, should in some way be held accountable for their suppliers’ performance.
Part of this accountability depends on the accuracy of lead times in your SAP system’s master data. If buyers will be measured based on the delivery reliability of suppliers, then it stands that buyers will also need to be accountable to ensure that your SAP lead times reflect your reality. The significance of this is that once lead times in SAP are accurate and adhered to, conversations can begin with your suppliers to begin reducing their lead times. With lead-time accuracy, adherence and reduction being well managed, the significance of other relevant measures will start having more meaningful affects on your business.
Since both of these standard SAP vendor performance management reports rely on accurate master data and good management of your purchase-order dates and goods-receipting practices, procurement leaders will need to instil good discipline amongst buyers and warehousing staff. In fact, this discipline will need to extend to your sales force, planners and other requisitioners. If you are not managing the quality of your demand and other internal procurement processing times, the performance of buyers and suppliers will always be negatively affected.
This raises a new challenge, one that talks to integrated performance management. Once again SAP has standard toolsets that will allow you to manage and measure integration between procurement and the demand drivers in your business. Aside from learning how to use these tools, there is a more significant challenge, which is getting all supply chain contributors to agree to take on some of the accountability affecting the performance of your buyers and ultimately your suppliers. If the quality of demand is poor it is increasingly difficult for purchasing to guarantee good supplier delivery reliability. Demand that is consistently unplanned, has unrealistic delivery dates and quantities or simply ignores lead times or economic order quantities drives procurement in such a way that many of the more intricate procurement performance measures are not easily met. The mandate becomes “Just get it here!”, which is costly to companies in all sorts of ways, and any optimisation efforts will suffer.
A word of caution: before procurement moves to improve the quality of demand and behaviour of their customers, there is some work to be done in your buying teams.
Begin by measuring supplier delivery reliability: are you getting too much or too little, too late or too early? Figure out why you do not get exactly what you want when you need it. You will find it is not only the quality of demand, but also the quality of your lead times, other master data and often the behaviour of buyers and suppliers that detracts from good delivery reliability. Address this first, as best you can, before you start challenging the demand drivers in your business.
For more information on leveraging the capabilities of your SAP system, contact Steven Freemantle on firstname.lastname@example.org