Intro to Procurement Productivity Metrics
Are Your Procurement Metrics True Productivity Metrics?
PurchTips Edition #399
Today’s executives love metrics. Specifically, they love productivity metrics.
Productivity metrics indicate how much output an organization gets from each unit of input. For example, “cost savings” is a good metric, but it’s not a productivity metric by our definition. Productivity metrics involve division.
As a productivity metric, cost savings could be expressed as “average cost savings per procurement employee” or “cost savings as a percentage of procurement operating costs.” So, if a procurement team achieved $10 million in annual cost savings and had 20 employees, the “average cost savings per procurement employee” would be $500,000. If that procurement team’s operating costs – consisting of salaries, benefits, facility costs, and other overhead – were $2 million, then the “cost savings as a percentage of procurement operating costs” would be 500%.
What executives like about using productivity metrics is that they expect them to improve over time. Additionally, even if the output has to change, executives expect team leaders to make changes to input levels and still improve productivity.
For example, if the cost savings in the example were due to a one-time capital improvement project, the team may not need all 20 employees after the project ended. So, if the team only saved $6 million the next year, that wouldn’t necessarily be bad if it reduced its head count to 10 employees and its operating costs to $1 million. In that case, the new year’s “average cost savings per procurement employee” of $600,000 and the “cost savings as a percentage of procurement operating costs” of 600% would actually represent productivity improvements, even though total cost savings would be lower.
In functions like procurement where output can change year to year due to business conditions, productivity metrics can be useful. I challenge you to think of the other performance metrics you use that can be converted to productivity metrics.
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By Charles Dominick, SPSM, SPSM2, SPSM3
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