Q&A with Mayank Chandla: Part 2 – More About Procurement KPIs

In our latest Q&A, well-renowned procurement leader Mayank Chandla shared his insights on procurement maturity – during a time of economic crisis – and the key performance assessment indicators to focus on.

We are now going to explore these performance assessment indicators in more detail.

 

Can you explain what a Source to Pay Practice Framework looks like?

Typically, we can classify procurement activities across Source to Pay in the following areas:

Procurement Governance – establishing policy and guidelines, strategies and objectives, roles and responsibilities, performance tracking and follow-up

Category Management – analysis and development of category strategy, targets, and action plan by category

Source to Contract Management – development and execution of sourcing strategy, and implementation of contracts

Purchase to Pay – covers entire spectrum of ordering and invoicing activities

Supplier Relationship Management – continuous and systematic supplier evaluation, supplier lifecycle performance and risk management

What are the key indicators of good practice in these areas?

We discussed Procurement Governance in the previous Q&A, so I will focus on Category Management and Source to Contract.

An organisation with good Category Management would demonstrate development of a category profile, which includes:

  • Spend Analysis
  • Needs Analysis
  • Market Analysis
  • Total Cost Calculations
  • Opportunity Assessment and Eliminations

There should be continuous development and updating of detailed category strategy, defined KPIs and performance tracking against targets.

An organisation with good Sourcing Management would have the following in place:

  • A sourcing strategy that aligns procurement activity with overall corporate strategy and objectives
  • A Strategic Sourcing Methodology to develop sourcing strategies and category profiles based on needs and market analysis
  • Awareness and consistency across the organisation (with all category managers) in using the methodology
  • Common and consistent approach to managing Sourcing events (RfXs, Auctions)
  • Availability of libraries and templates for various types of supporting documentation for sourcing events.
Can you share a few examples of best practice for Contract Management?

Good Contract Management requires:

  • Well-defined governance for contract lifecycle management, including authoring in collaboration with suppliers, centralised digital storage of contracts and seamless handover into the purchasing process
  • Availability of templates and legally approved clause libraries for contract documents
  • Clear ownership of contracts between legal and sourcing managers
And how about for a Purchase to Pay Process?

Prerequisites for good P2P practices are good procurement governance and upstream source to contract and supplier management practices.

It is essential to have a good self-service requisition and ordering platform which has embedded buying channel, contract compliance and procurement policy.

Proper classification of categories, units of measures, an inbuilt delegation of authority, short approval flows which are primarily based on requisitions rather invoicing, unless the channel is invoicing against contracts.

Operationalising contracts is key for P2P, a good level of catalogue content and of course suppliers enabled for e-invoicing. As always clear process ownership is very important.

Lastly, what should be aiming for in Supplier Management Practices?

Supplier Management is key and a topic in itself, but in brief there are two key indicators:

  • Optimising Supply Base
  • Managing Supplier Performance and Risk

It is imperative for procurement to define criteria for what would constitute a strategic, preferred and approved supplier for them.

For example, a strategic supplier would be representative of either a unique offering, significant investment, seen as a building block for future growth and generally associated with a high switching cost.

In my mind, one of the greatest values that procurement can deliver is managing strategic suppliers through a well-defined performance management programme that encompasses holistic performance on KPIs i.e. Cost, Quality, Innovation, Continuity of Supply and Account Management.

A transparent supplier performance management activity helps add value to both buyers and suppliers and helps organisation deliver greater experience to their customers and enhance the brand value.

Q&A with Mayank Chandla: Procurement Technology Leader

With the global health pandemic, economies around the world are grinding to a halt and we are faced with an imminent recession.

Companies large and small are urgently trying to lower their operating costs.

To empower businesses to run their supply chain more efficiently and make valuable cost savings, we are running a series of Q&As with Mayank Chandla, a leader in procurement technology.

What should organisations and procurement teams be focusing on in the current climate?

Naturally, a recession is the time when the lens turns to cost savings and operating margin, rather than sales and revenue.

Organisations can potentially have more grip on controlling their costs than getting customers to buy their products and services. This is truly the time where procurement professionals are under the spotlight – and have the chance to step up and steer their ship in order.

The best place to start is to assess the current maturity and performance of their organisation’s procurement and then focus on how to make improvements.

Whatever the current state of the organisation, there are so many levers to create a positive impact.

 

How can organisations assess their current procurement state?

To examine procurement maturity, you need to start with answering some fundamental questions.

  1. Is the procurement function organised to deliver optimal value based on outcomes or is it merely seen as a cost saving support function?
  2. What level of procurement governance is in place?
  3. Is there a well-defined procurement policy that governs how spend is managed across categories?
  4. Is there a well-articulated buying channel strategy across categories and spend levels?
  5. Is there sufficient processes, tools and procedures in place to enforce compliance across procurement policy?

 

What else do you need to consider in a procurement review?
  • Is there a well-defined strategic sourcing program aligned to the wider organisational strategy?
  • Is the procurement function involved in Demand Management Initiatives?
  • Is there a set of clear procurement performance KPIs and ways to measure them?
  • Is there a shared understanding of key activities, competencies and responsibilities that are required for each role to achieve the wider objectives?
  • Is there communication and training in place to allow for approved ways of working?
  • Does the procurement lead have a well-defined supplier performance and risk management program, and have supplier classification in place?

 

What are the typical performance indicators?

Like a doctor can measure the health of their patient, a procurement organisation can measure performance on defined key performance indicators.

  • Percentage of spend under management control and influenced by procurement organisation 80% or more would indicate an agile mature organisation
  • Percentage of spend with top/strategic suppliers – e.g. how long is your supplier tail spend or percentage of maverick spend? 40% or more maverick spend would indicate a fairly immature procurement organisation
  • Percentage of contract spend compliance 95% or more would indicate a world-class organisation
  • Percentage of e-invoicing enabled suppliers 90% or more would indicate a mature performing organisation
  • Average requisition to order cycle time
  • Simple efficiency measures such as: Average cost per PO, cost per invoice processed, number of PO and invoices per FTE, percentage of timely invoice payments, percentage of spend under payment term, discounting etc.
Can you provide insight on the potential impact of improving these KPIs?

If you are processing 5,000 POs per FTE annually and the industry benchmark is 20,000 POs, even if you were to double your PO efficiency through better tooling or processes, for a company that does 200,000 POs annually, it could mean saving $1million plus on PO processing costs alone.

Or if you are introducing a payment term discounting program and applying it to 10% of spend, this could result in an additional $2million (of a $1billion spend).

In our next Q&A we will go into more detail on how to improve performance on procurement KPIs, and practical suggestions to deliver value for more mature organisations.

Feel free to message the team at SapienceS2P if you have any questions or topics you want to hear more about. 

 

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