Valuing the purchasing function... We decided to give you the user manual!

Representing up to 70% of turnover, the impact of purchases has become strategic and indispensable for businesses. So why can't we manage to valorize the purchasing function ? Why are procurement departments facing a lack of recognition of their role as a contributor to company performance? Why is it that we so often ignore the added value provided by Purchasing function within the company? Are there purchasing performance indicators that would draw the attention of other departments and internal customers, which would give them real information on its functioning and its assets? In this article, I decided to give you instructions on how to highlight The purchasing function.

Why is it difficult to recognize the value of the procurement function?

To understand the lack of recognition of The purchasing function, we will have to go back in time. The purchasing function appeared with the development of railways in the United States, that is to say in the 1850s. Despite this early desire to distinguish between purchasing and sales activities, this function has still not received the recognition it deserved. Indeed, it has always been considered as a simple administrative function or a support function. This is even though Fayol said in 1916 that “buying is just as important as selling.”

Certainly, the difficulties encountered by companies in finding raw materials after the wars led to an initial form of recognition of The purchasing function with the creation of the Compagnie des Dirigeants et Acquirers de France. But it won't last.

In 1964, Henderson considered Purchasing to be a negative function. They could lower business performance if they are not done well. However, they do not provide any added value to the business. This period coincided with the Thirty Glorieuses during which raw materials were abundant. The function of the buyer was therefore purely administrative. This consisted only of monitoring supplies.

It was from the 70s that The purchasing function has finally begun to be recognized. The diversification of supply and the strengthening of competition have pushed companies to implement effective purchasing strategies to obtain a competitive advantage by reducing costs and collaborating with better suppliers.

Progressively, the administrative dimension of The function of the buyer was therefore abandoned for a more strategic dimension. Purchasing was seen as one of the ways the company could increase its performance through cost optimization, quality improvement, and lead time reduction.

The Purchasing function became very professional from the end of the 90s with the emergence of the Internet. New tools have emerged, including Source-to-Pay software to automate the purchasing process. Thanks to these new tools and to the new way in which the Purchasing Department operates, the Purchasing Department has received greater recognition. It can help a business maintain margins, innovate, and create strategic relationships.

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Performance of the Purchasing function VS performance of the company

One Purchasing function efficient is a recognized and valued function. But what do we mean by the performance of the Purchasing function? Is it different from that of the company?

In principle, the definition of the purchasing strategy comes from the business strategy. This means that the performance of the company depends on that of its Purchasing function.

The procurement process should not be separated from the company's general policy. From the latter, it is necessary to define a purchasing policy that is influenced both by the objectives of the company and those of other functions.

It is the purchasing policy that serves as the basis for defining the purchasing strategy. The latter includes all the actions to be carried out, the timetable to be respected, the objectives to be achieved and the actors involved in the procurement process. Once the purchasing strategy has been defined, it is necessary to move on to its application. Purchases and supplies must be carried out in accordance with predefined action plans. After the execution, it is now time to evaluate the purchasing performance. It is a question of taking stock of each action and evaluating the progress of the strategy and the results based on indicators.

Why measure purchasing performance?

As mentioned above, the performance of the purchasing department makes it possible to valorize the purchasing function. But you still need to know how to measure this performance in order to offer the purchasing department the recognition it deserves. What value Does the purchasing function contribute to the company?

Measuring the performance or ROI of The purchasing function is relatively complex. Indeed, many criteria must be taken into account for it to be optimal. One of the methods for measuring procurement performance is to define goals to be achieved in terms of cost, time and quality. These are the pillars of measuring the ROI of The purchasing function. They should be as accurate as possible. The buyer must define in advance the deliverables expected from the suppliers.

It is also necessary to determine performance indicators or KPIs adapted to The purchasing function. It is the most effective way for the purchasing department to be valued or recognized by all the other departments with which it collaborates. By presenting its results with a recognized approach and indicators accepted by all, it is more likely to be valued by all the company's other departments.

It has become common to use dashboards to present procurement KPIs. Dashboards aren't just more visually appealing. They are also more accessible. Measuring the performance of The purchasing function can be more easily understood in this form. In addition to promoting the recognition of the purchasing department, measuring purchasing performance also makes it possible to improve the management of the entire purchasing department.

Indeed, the figures it brings out make it possible to identify the points to be improved and the strengths of the service. They also make it possible to allocate resources appropriately to the company's various types of purchases. In this respect, measuring the performance of the purchasing department is therefore a real aid to decision-making within companies.

How to promote the purchasing function

I would like to give credibility and visibility to The purchasing function, but how?

• Through the integration of contractors very early in the expression of needs;
• Thanks to the commitment of suppliers as true partners;
• Through the greater involvement of management control in cost monitoring;

... You will be able to reassure management and internal customers about your values and show them your importance within the organization.

Managing the purchasing strategy is not a sovereign mission of the purchasing department alone. Other departments have their added values to contribute to the process, which will focus as much on the evaluation and respect of contractual commitments as on the permanent benchmark of service costs with the best practices on the market.

The use of appropriate matrices will allow a Purchasing Director to have all the visibility necessary to identify areas to focus on.

The Purchasing Manager will then have a map (“Balanced Scorecard”) of his scope of action that is much more dynamic than the simple patchwork of curves and figures.

This approach makes it possible to quickly visualize the commitments under control, the optimizations made and all the projects in progress. In addition, it also allows for a very broad sharing and involvement of internal customers and finance.

I don't know which indicators to choose...

Below is a memo tool to download, offering a list of monitoring indicators (not exhaustive). These provide a first idea of “current” measurement indicators.

However, there are other indicators that are more specific to your organization, so ask yourself the right questions. Think by goals. What are my priority goals? What do my managers or internal customers ask me on a regular basis? What indicators will value the purchasing department?

These indicators can be weighted to highlight the importance or impact of each other on the managed activity.

I am starting out in performance monitoring...

The implementation of these indicators must also be gradual for a company embarking on the process. Start with 4 or 5 global metrics, such as deployment metrics.

You can also start by monitoring an indicator on a restricted area. The scope will correspond to a type of purchase or a type of supplier for example. This will make it possible to make monitoring reliable and sustainable, and to support the gradual deployment of the approach.

Some examples of indicators to assess the performance of the procurement department

To measure the effectiveness of The purchasing function and thus be able to value it in the eyes of other business units within the company, several performance indicators or KPIs must be used.

Among them, we can mention the indicators that make it possible to assess the productivity of The purchasing function, such as the ROI of the purchasing department. It is the relationship between the savings made on purchases and the expenses of the procurement department. ROI represents the reduction in costs due to the work and efforts of the buyer.

To measure purchasing performance, you can also assess the performance of the procurement strategy adopted. It is a question of calculating the gain made thanks to the purchasing strategy. To do this, it is necessary to calculate the difference between the reference price and the price actually applied by the supplier. All that remains is to multiply the result by the forecast volume.

In addition,

Other KPIs also make it possible to highlight the performance of the purchasing department through the effectiveness of the implementation of supplier contracts. These indicators also make it possible to valorize the purchasing function insofar as they allow to know the properties, quality, price and delivery time of the products ordered. Among these indicators is the cost/value correlation, which makes it possible to assess the real compliance with contracts by calculating the number of invoiced purchases.