Moving from Price to Value Metrics
Our blog “If Value Matters, Why Am I Measured on Cost?” always gets a lot of interaction from purchasing managers who believe that performance metrics that focus on PO to PO price reductions do not show the value that purchasing is providing their companies.
Here is a thought. Instead of waiting on the CEO’s and CFO’s to change, why don’t we take advice from Michael Jackson and look at the man (or woman) in the mirror and change our ways?
I am not advocating a palace coup or running immediately away from the cost-based metrics. What I am advocating is that purchasing managers, who have strong opinions that their metrics are misaligned, supplement them with value-based metrics which demonstrate the bottom line value CEO’s say they want from purchasing. Here are some examples of actions we have seen purchasing organizations take:
- Continue with the standard, cost-based, PPV reporting but add value-based metrics that include the cost impacts of testing, production and customer givebacks.
- Supplement business plan to business plan reporting with a rolling 12-month outlook on material savings to provide better visibility to their savings pipeline.
- Conduct monthly cross functional reviews of material costs to coordinate implementation as well as to agree on the value-based impact of all the projects (including a ROI for each project).
- Calculate a ROI for their purchasing department budget: Annual bottom line impact divided by annual department cost. This is a good metric to have when facing budget cuts.
- Measure the costed bill of material for new programs versus old. Set goals to reduce the costed bill on new programs.
- Move their buyers to value-based metrics even though their performance was cost-based.
Yes, all these steps took time and effort to implement. But I am not advocating you take them all. Pick the one or two that have the best ease of implementation to benefit ratio and start with them. Then keep progressing down the path that you know is right and see if the CEO comes along.