One of the essential factors affecting the effectiveness of managing a company is the quality of information used in the decision-making process. Naturally, companies attempt to systemise the flow of information, classify and assess it and to develop relevant methodologies and tools to improve the management performance. Key Performance Indicators is one of the instruments designed to handle a specific scope of information in a systematic manner.KPI is an agreed set of definitions sufficient to explicitly describe a specified parameter. Therefore, the set should at least cover the description of the parameter, its quantization i.e. the introduction of a scale, as well as the method description and frequency of monitoring, for example: “a monthly number of complaints (in numbers)” defines the parameter of “complaints”, the frequency of “one month” and the measure by “numbers”.
How to define relevant KPIs?
The starting point for developing KPIs should be to define a long-term strategic goal or goals that a company would like to measure and assess. To introduce a system of indicators, the company should next determine parameters that describe the level of their realisation. A good practice is to eliminate derivative or reasonably dependant parameters, because using them affects the clarity of the situation and provides no data for analysis. Once the parameters have been established, it is necessary to precisely determine the manner and frequency of verification and the scale. In practice, companies often fail to carry out the last step and leave a “default” definition. Whereas even parameters that seem obvious such as percentage of orders under framework contracts may have different interpretations: “a percentage against what?”, “the orders received or completed?”, “percent of the quantity or the order value?” etc. Therefore, it is recommended to spend some more time on describing KPIs as precisely as possible, including obvious aspects.
Accurate selection of KPI = good decisions in the future
KPIs for purchasing functions may be divided into groups that describe different areas of analysis or relate to specific strategic goals. For example, the area of analysis should definitely cover the following groups:
A group of performance indicators that are closely related to financial goals of the company. Such indicators are easily defined, measured and accessed. Their expected values may result directly from the company’s strategy. They include KPIs that are straightforward and understandable as, for example, the most popular reduction of purchase costs and those, expressed in money, but relating to a different area as the reduction of stock. However, indicators in this group should not be treated recklessly or too briefly. This is because they have a significant impact and if defined without in-depth analysis, they may result in negative effects. One of the examples is making all efforts to increase the indicator of purchase cost reduction, which may cause the uncontrollable passing of costs to other areas of business operation.
MEASURING THE PROCESS PERFORMANCE
Another common group of indicators focuses on the attempt to answer the question: how well and effectively we planned and carry out our activities. Such indicators are generally slightly more remote from the strategic goals and support them indirectly. Typical examples of the indicators belonging to this group are the number of tenders (purchasing projects) by a buyer or the percentage of orders under framework contracts.
This group of indicators should define the quality of the measured activities. However, it should be noted that quality parameters do not relate solely to such non-measurable areas as internal client satisfaction. A quality parameter may also be the number of complaints or number of orders that were not performed on time. In that case, its value may be directly translated into money.
OTHER INDICATORS: SOFT, COMPETENCY-BASED ETC.
There are also other KPIs commonly used for the assessment of purchasing functions and not covered by the groups referred to above. Undoubtedly, these are indicators relating to the area of competence building and development. Especially advisory companies promote such indicators. In my opinion however, even though the assessment of competence development is very high it only remains art for art’s sake if it fails to improve the value of the “hard” indicators. Another category is indicators relating to the company’s image or brand. In the case of purchasing function, this may be the improvement of the company’s image from suppliers’ perspective.
KPIs help us obtain information we need for our decision-making processes. The least complicated “manual” navigation is, however, labour-intensive, error-prone and ineffective. Therefore, usually, several tools are combined to create more complicated navigation systems. A good solution is to link KPIs to an incentive system of the company. In this way, a kind of a self-controlling arrangement is developed and the expected values of indicator levels are entered into it. Operational activities undertaken to achieve these levels are delegated automatically within the organisation in a downward direction. When structuring this kind of system, it is critical to select KPIs that are relevant to the decision-making accountability on individual levels and to set reasonable and achievable expected values.