The Monthly Metric: Metrics of the Future
At many supply management organizations, analytics during the coronavirus (COVID-19) pandemic have been more about survival than strategy, as this space has previously discussed. At some point, however, practitioners will again use metrics largely for strategic objectives, especially given the availability of technologies that enable a better understanding of data.
This reset offers an opportunity for purchasers and supply managers to reevaluate their metrics and how they can measure their departments’ contributions to overall business goals. As a result, The Monthly Metric’s analytics antennae were raised by a report from CAPS Research, the Tempe, Arizona-based program in strategic partnership with Arizona State University and Institute for Supply Management® (ISM®).
While procurement’s impact on the bottom line remains the primary focus of the C-suite, Metrics of the Future: Moving Supply Management Beyond Cost Reduction identified 14 other areas in which the function contributes to a company’s success. They include management of risk and working capital, as well as contributing to innovation and product development.
One of the authors, Lisa M. Ellram, Ph.D., MBA, C.P.M., Rees Distinguished professor of supply chain management at Miami University in Oxford, Ohio, discussed the report in a webinar in August. The report is based on interviews with 31 people at 22 organizations, and one of its biggest lessons for purchasers and supply managers is that metrics must be cross-functional — high-performing companies, Ellram said, “don’t want people fighting over them.”
She continued: “The key perspective was: How does purchasing help the business unit be successful? … That’s what (executives) want to see. Usually, that means purchasing needs to get on board with the metrics the business unit has. They don’t want to see too many metrics. Give them something on cost, how (the function) helped get more sales, got products to market quicker, or got an acquisition up and running.”
Metrics as a Team Sport
While the report focuses on expanding the gauge of procurement’s contribution beyond the bottom line, for many organizations, cost savings will continue to be the primary role of the job and a major component of KPI dashboards. Nevertheless, finance needn’t be viewed by procurement as a numbers-crunching killjoy; the departments can easily work together to achieve organizational goals, Debbie Fogel-Monnissen, ISM’s CFO, told The Monthly Metric in 2018.
Such sentiment was affirmed by the report, which found that companies with joint purchasing objectives and accountability (1) had better cross-functional synergy and (2) were more satisfied with their metrics.
“Speaking the language of management with the finance (function) is important,” Ellram said. “I have seen an evolution, and it was backed up by this research: Purchasing is reporting more often to the CFO. So, the support is there. We’re increasingly seeing a close working relationship with finance, with (procurement) making sure there’s an understanding of the savings being generated, and that the reporting makes sense. (In turn), finance is supporting purchasing when needed, helping it tell the right story.”
The report identified six levels of metrics maturity; Ellram said that most surveyed companies were at Level 4, where procurement is receiving some company-wide recognition for the value it adds beyond cost savings and has shared metrics with other functions. The highest-level performers, Ellram said, leverage predictive analytics to get ahead of potential issues and provide support to other functions’ metrics.
Measuring Risk Remains a Challenge
The paucity of reliable analytics to identify and measure risk has been a theme of The Monthly Metric since its inception. That was affirmed by the report’s research, which was conducted before the pandemic. “So, you can imagine how important it is now,” Ellram said.
The biggest challenge in measuring risk management: It’s hard to gauge until a breach or disaster occurs. Of the 22 companies surveyed in the report, eight had a risk-management metric, and only one had a qualitative analytic.
“It’s just so hard to measure,” Ellram said. “The CFO of one company said risk is the most important thing the company is dealing with. … The only way you can tell how you’re doing on risk is if there’s a failure. Purchasing does a lot to (manage risk) and make a company run more smoothly, and you notice it more when it's not working. But the qualitative measures are difficult to capture.”
Another area in which metrics are lacking is sustainability. “Supply managers are interested in sustainability and want to drive it,” Ellram said. “But unless it’s a green company that (promotes) itself as selling sustainable products, it hasn’t been front and center. It will be an interesting transition, but I think purchasing can use (existing skills) to help move suppliers into a more sustainable area.”
Scanning a Future KPI Dashboard
The philosophies and challenges are critical parts of the discussion, but the metrics themselves matter most, right? With cost reduction still a key objective, Ellram said, procurement organizations are redefining some savings metrics. “They are translating cost reduction into measures that are hopefully meaningful to (other functions),” she said.
Such measurements include procurement ROI, project ROI, capital preservation and savings per full-time employee. A new area of emphasis, Ellram said, is cash-flow contribution, an analytic that procurement practitioners can impact through approaches like extending payment terms, providing supply chain financing and reducing inventory.
The search continues for tangible and reliable risk metrics, but Ellram identified two emerging ones: percentage of supply with alternate sources and percentage of suppliers with a good financial audit. “So, at least you can report what’s covered,” she said. “Sometimes, that’s not as interesting, depending on how people view risk. But you can show that, even though it’s hoped (the company) won’t need it, things are covered if something happens.”
The report lists several other metrics, and CAPS Research’s annual Metrics of Supply Management cross-industry report is another resource for analytics and benchmarks.
“(In the end), metrics tell a story,” Ellram said. “Purchasing needs to position its story to appeal to the business unit, customer or whoever it’s servicing: Here's how we’re helping you. We're saving you money, yes. But we’re helping you in other ways.”
To suggest a metric to be covered in the future, leave a comment on this page or email me at email@example.com.