The 6 Steps of Procurement Performance Management
Procurement teams have their work cut out for them. Strategic sourcing takes a significant amount of effort, investment, and the right players to get it done successfully. But with a keen eye focused on Procurement Performance Management (PPM) and the right tools, the process can be greatly simplified and offer immense potential for savings. However, when companies use cost as the sole factor in guiding their procurement strategy, businesses are often left with rigid tools and a lack of adoption.
Procurement is an essential cog in the wheel of business development and managing procurement performance enables you to identify priorities and allocate resources according to your projects. As a result, the collaboration between the procurement team and all the company stakeholders is now essential for long-term success.
You may be asking, “What is procurement performance management?” PPM is the ongoing process of measuring the efficiency and spend of procurement teams with the goal of increasing visibility and enhancing the value of Procurement within an organization. By engaging in PPM, organizations can save money and more efficiently manage their sourcing pipeline and business operations.
In a context where digitalization is transforming organizations and reinventing how we do business, the mission of procurement teams and the tools they use have also evolved. Digital transformation makes it easier to overcome the traditional lack of collaboration and it helps make buyers’ actions visible to internal stakeholders.
Regrettably, cost reduction is too often the primary metric used to measure the contribution of procurement teams. However, there comes a time when it is no longer possible to bring significant price reductions, which is why purchasing professionals need to assert their value in the company through other means.
The best way to do this is with formal, measured procurement performance management. But to move forward, you need a plan. Effective procurement performance management is broken into 6 steps: identify opportunities, prioritize projects, forecast savings, collaborate across teams, measure progress, and communicate results. Let’s take a deep dive into these essential steps so you can supercharge your performance management, starting today.
1. Identify Opportunities
Procurement performance management is all about optimizing processes. A significant part of this involves greater visibility into existing structures and modifying processes to improve efficiency and value. To begin, you must identify all cost reduction opportunities, decrease risks, and improve the quality of your supplier products. Take measures to remain informed of all contract expiration dates, requests from sales teams and external events, such as potential risks with some of your current suppliers.
2. Prioritize Projects
The next step involves determining which opportunities need your immediate attention and which can wait until a later date. Document all of your opportunities and prioritize the projects in your sourcing pipeline based on value or risk, giving those with high stakes your immediate attention. Make sure to engage your purchasing team in this exercise. Purchasing teams typically know exactly what they should focus on first and they also have a clear view of what they need to do. Finally, re-allocate resources where necessary.
3. Forecast Savings
Now, we arrive at savings, the seemingly all-important metric. Make a realistic forecast of contractual savings for each sourcing project. However, it’s important to know that this is not a “once and done” exercise. Be sure to continuously re-evaluate savings forecasts as sourcing projects progress. In addition to the qualitative benefits, you will have a reliable figure that indicates the total expected savings per contract your team is committed to achieving within specific timeframes (month, quarter, fiscal close, etc.). These figures go a long way toward showing your executive team how valuable Procurement really is.
4. Collaborate Across Teams
Collaboration is one of the most important steps! Gathering information and restructuring will not accomplish much if you don’t communicate your goals and work with your teams to see them through. In addition, gaining complete transparency of the sourcing pipeline enables agile management and accelerates savings and project completion.
As you work to increase your collaboration, make sure to anticipate bottlenecks. The PPM process will enable greater agility and equip you to better respond to the demands of your business stakeholders.
5. Measure Progress
You want to be able to illustrate your progress to others so you can keep up with the PPM process and continue improving. Measure your ROI and progress as you work to achieve your procurement objectives. Be aware of events and bottlenecks that can threaten the effectiveness of your team and adjust to optimize your processes. Get quantitative and qualitative results to demonstrate the contribution of purchasing to the business. Show your value!
6. Communicate Results
The final step in being a PPM pro is sharing clear progress reports with all your company’s stakeholders. The point of optimizing your approach is to become more efficient and demonstrate the impact you are having on the business. Structure your reporting to illustrate both financial and non-financial performance:
- Risk reduction
- Improvement of supplier quality
- Cost reduction
Strategic Procurement is about much more than cost cutting. So if you’re ready to stop being viewed as the spend police or cost killers, PPM is the way to make your procurement team a strategic business function.
Ready to take the next steps? Download our white paper for an in-depth look at how you can harness the power of procurement performance management.