Daniel Maucher

Performance Measurement and Incentive Systems in Purchasing : More Than Just Savings

In recent years, purchasing performance measurement have steadily gained in importance in theory and practice. Yet, in many cases, the focus still remains on cost items, especially savings. Moreover, reported performance ratios in purchasing are frequently called into question in terms of their amount and efficacy. Most of the time, there is no tie-in at all with staff compensations. To meet these and other challenges, this book presents a holistic approach for purchasing performance measurement and the incentive systems associated with it. The following topics are dealt with in detail: - Purchasing performance measurement on the level of commodity groups and the procurement organization - Supplier evaluation and performance measurement on the level of the buyer-supplier relationship - Comprehensive systems for purchasing performance measurement, such as the procurement value added and the purchasing balanced scorecard - Performance-oriented incentive systems and bonus payments for buyers, procurement organizations and suppliers Readers are thus provided with comprehensive guidelines for the implementation and realization of sustained performance measurement and incentivization in purchasing.

Ten Steps to a “Sustained” Purchasing Performance Measurement

To introduce the described methods, ratios and incentive systems in a company, an implementation process is required for purchasing performance measurement. Figure 8.1 shows the ten steps for the implementation of “sustained” purchasing performance measurement. Sustained in this respect means that the performance measurement is implemented long-term and also based on sustainable objectives in purchasing.

Supplier Evaluation and Performance Measurement on the Buyer-Supplier-Relationship Level

The purchasing function is characterized by the close collaboration with suppliers and service providers. Accordingly, and in addition to company-internal performance factors, a company’s overall performance in purchasing is also affected to a considerable degree by the suppliers’ performance and the relationship between supplier and buyer. Only recently, awareness has been gaining ground that the relationship between supplier and buyer also presents a value which needs to be evaluated. In the academic community, that topic actually has been discussed for some years already; yet, in business practice, measuring this relationship was hardly significant so far.

Excursus: Concepts for Increasing Purchasing Performance in Corporate Practice

The following describes selected purchasing situations in corporate practice and necessary supplements which are to be taken into account in designing an appropriate purchasing performance measurement. Through these purchasing situations and the outlined approaches or concepts, it is possible to generate additional savings which can be attributed to purchasing.

The Purchasing Performance Measurement Challenge

Especially in difficult economic times, the purchasing function will be the center of attention since savings in purchasing have an immediate effect on the corporate result. But in phases of economic upswing as well, the focus on purchasing should not be lost—although, in those times, sales will rather be in the foreground. In both situations, procurement will have a major effect on corporate performance. To realize the same effect in results as with a reduction of the cost of materials by 4 % for example, a company’s sales would have to increase by 33 %—taking into account a procurement rate of 50 % customary in many industrial sectors, as well as a return on sales of 6 %. Economic trend changes generally also result in significant market fluctuations in the area of raw materials and commodities as well as in consequences for production capacities. While it is easier to realize savings in times of crises, the economic recovery phase is mostly characterized by fending off price increases and ensuring the security of supplies which both will be in the foreground of interest for decision-makers.

Purchasing Performance Measurement on the Procurement Organization Level

Basically, purchasing can be subdivided into two dimensions—functional purchasing and organizational purchasing. Functional purchasing designates carrying out procurement activities and other purchase-specific activities, such as supplier selection, regardless of whether they are carried out by the purchasing department or not. Accordingly, this category also includes the purchasing activities of other departments. In contrast, organizational purchasing designates the bundling of purchase-specific planning, control and monitoring processes in one organizational unit. This is the level where process optimizations take place and the classification of various commodity groups and suppliers. The following provides the focus for performance measurement of the procurement organization.

Holistic Systems for Purchasing Performance Measurement

Any determination and presentation of a multitude of unstructured individual ratios will quickly result in a confusing and unclear performance measurement which renders impossible any targeted control or management of purchasing. An approach for this challenge is provided by holistic measuring constructs or working concepts. This includes the procurement value added (PVA) which, based on the economic value added, presents purchasing’s monetary value contribution. A major role here has especially the potential of public data recording and the value orientation of the top ratio.

Purchasing Performance Measurement at the Level of Commodity Groups

A special challenge is presented when measuring the purchasing performance on the basis of data in the profit and loss account. Employees are often very skeptical since savings by the procurement organization are frequently not shown in budgets or the P&L. It is thus possible that purchasing will report savings of 800,000 € Mio. while the company’s P&L shows a loss of 1.6 € billion.

Methodik und Datengrundlage der Untersuchung

Die Studie wurde im Rahmen personlicher Interviews mit 18 Unternehmen durchgefuhrt. Im Folgenden werden die methodische Vorgehensweise sowie die Datengrundlage der Untersuchung naher erlautert.

Grundlagen und praktische Herausforderungen

Der Investitionsgutereinkauf unterscheidet sich anhand wesentlicher Eigenschaften vom Einkauf anderer Guter und Dienstleistungen. Anhand der Charakteristika der Investitionsguter, dem Prozess des Investitionsgutereinkaufs sowie den involvierten Akteuren sollen diese Spezifika sowie die sich daraus ergebenden Herausforderungen dargestellt werden.