PuSm - Lecture 13 - Chapter 13 - Slides - Online

Graz University of Technology
1 Institute of Business Economics and Industrial Sociology

Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk
Purchasing and Supply Management

Lecture 13.
Performance measurement and governance in
purchasing
Prof. Dr. Bernd M. Zunk
Course no. 373.551, 4.5 ECTS, Lecture
Winter Semester 2020/21 (Online)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
2 Learning objectives
After this lecture you should understand the following:

• The factors that influence the way performance
measurement is executed and evaluated.
• The key areas that should be considered when measuring
and evaluating purchasing performance.
• The methods, techniques and performance measures that
can be used.
• How to conduct a purchasing audit as a tool to improve
purchasing performance.
• The value of benchmarking in purchasing.
• The role and importance of governance rules in purchasing.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
3 Introduction: Case Study – The introduction of a quality
programme by an industrial components manufacturer
*Note:
The full text of this case study you may find in the primary literature for this
course, the textbook “Purchasing and Supply Management“ written by Arjan
van Weele (2018), 7th edition, p. 302.
4 Introduction: Case Study – The introduction of a quality programme by an
industrial components manufacturer (remarks)
The introductory case illustrates that …

• … measuring and evaluating of purchasing performance is a
fuzzy issue yet, it is one of major concern for many companies.
• … the question of how to measure and evaluate purchasing
performance is not easily answered.
• … to date no single, practical approach that produces
consistent results for different types of companies has been
found.
• … general managers and purchasing managers typically need
to rely on their own insight and experience when establishing
procedures and systems to monitor the effectiveness and
efficiency of their purchasing organizations.
The remarks on the introductory case study refer to: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, pp. 301.
5 Factors influencing purchasing performance measurement (1/3)
• On of the most important factor that influences the way in which

purchasing results are measured, is how management looks upon
the role and importance of the purchasing function.
• In general, management may hold one of the following views

towards purchasing:
(1) Operational and administrative activity. Management
evaluates purchasing operations primarily on parameters such
as order backlog, administrative lead time, number of orders
issued, numbers of requests for quotations issued, adherence
to existing procedures, etc.
(2) Commercial activity. Management is aware of the savings
potential which purchasing may represent. Parameters being
used here are the total savings reported by purchasing,
number of quotations issued, variance reports, inflation
reports, etc.
(3) Part of integrated logistics. Management becomes aware

that price hunting has its drawbacks and may lead to sub-
optimization. Evaluation is aimed at quality improvement,
lead time reduction and improving supplier delivery
reliability.
(4) Strategic business area. Purchasing is actively involved in
deciding the company’s core business. Management
evaluates purchasing on i.e. the number of changes in its
supply base and its contribution to the bottom line in terms
of savings realized.
→ The way purchasing activities are measured and judged will differ
for every company considered.
Final note: It is almost impossible to develop one uniform method or

system for performance measurement in purchasing.
8 Why measure purchasing performance?
Purchasing performance measurement …

• … will lead to better decision-making since it identifies variances from
planned results.
• … may lead to better communication between departments, e.g.
analyzing the number of invoices that cannot be matched with a
purchasing order leads to better arrangements in payment
procedures.
• … creates transparency: Regular reporting of actual versus planned
results enables a buyer to verify whether the expectations, i.e.
targets, have been realized.
• … may contribute to better motivation: Properly designed, a
performance evaluation can meet the personal and motivational
needs of the professional buyer.
→ Why should purchasing performance be evaluated regularly?
(1) Rate the individual buyer
(2) Serve the purpose of self-appraisal
9 Why measure purchasing performance? Major problems to measure
purchasing performance
Problems related to purchasing performance measurement:

 Lack of definition of purchasing performance
 Lack of formal objectives and performance standards
 Accuracy with which the purchasing performance can be measured
(see Memo 13.1)
 Difference in the scope of the purchasing function
Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 309.
10 How to assess purchasing performance
Purchasing performance is considered to be the result of two elements:

(A) Purchasing effectiveness: Results actual/results planned
(e.g. material costs, quality, logistics, innovation, etc.)
(B) Purchasing efficiency: Cost actual/cost planned
(e.g. administrative lead times, orders per purchaser, etc.)
→ Purchasing performance thus can be defined as

“[…] the extent to which the purchasing function is able to realize its
predetermined goals at the sacrifice of a minimum of the company’s
resources (i.e. costs)”.
11 Measuring purchasing performance: Five key areas (1/2)
1
Remarks:
→ Purchasing’s strategic
contribution should translate
2 into superior operational
performance.
→ The operational performance
relates to flawless purchasing
3
and business processes that
are operated at the lowest
possible cost.
→ Purchasing’s operational
performance is demonstrated
4
by superior material cost control
and production, superior
supplier delivery performance,
superior supplier delivery lead
5 times and superior supplier
product quality.
12 Measuring purchasing performance: Five key areas (2/2)
• There are five dimensions on which measurement and evaluation

of purchasing activities can be based:
(1)
1 Price/cost dimension
(2)
2 Product/quality dimension
(3)
3 Logistics dimension
(4)
4 Supplier relationship dimension
(5)
5 Organizational dimension
• These five dimensions are strongly related with each other… →
13 Measuring purchasing performance: Five key areas –
Purchasing price/cost dimension 1
This dimension refers to the relationship between standard and

actual prices paid for materials and services. A distinction is made
between:
– Price/cost control
Continuous monitoring and evaluation of prices and price increases as
they are announced by suppliers (e.g. ROI measures, materials
budgets, price inflation reports)
– Price/cost reduction
Continuous monitoring and evaluation of activities initiated to reduce
costs in a structured way (e.g. searching new suppliers, value analysis,
substitute materials)
Budgets are important instruments for performance planning and

monitoring with regard to the price/cost dimension.
Purchasing product/quality dimension 2
This dimension refers to purchasing’s responsibility to secure that

products and services are delivered by suppliers in conformance
with specifications and requirements.
– Purchasing’s involvement in new product development.
Examples of measures:
Number of man hours spent by purchasing on innovation projects,
number of technical change orders and initial sampling reject rate.
– Purchasing’s contribution to total quality control.
Examples of measures:
Reject rates on incoming goods, number of approved/certified
suppliers.
Purchasing logistics dimension 3
• The purchasing logistics dimension refers to purchasing’s role to

contribute to an efficient incoming flow of purchased materials
and services.
• This includes the following major activities:
– Control of the timely and accurate handling of materials
requisitions
– Control of timely delivery by suppliers
– Control of quantities delivered
→ Supplier evaluation and vendor rating are techniques used to

monitor and improve supplier performance in terms of quality and
delivery reliability.
Supplier relationship dimension 4
Supplier relationships can be measured through:
• Operational measures. Monitor the operational relationship with the

supplier. Examples:
– Supplier price versus targeted price
– Supplier quality
– Supplier delivery reliability
– Supplier invoice processing (number of invoices processed without
difficulty).
• Strategic measures. Monitor the company’s position versus its
suppliers. Examples:
– Internal customer satisfaction in working with specific suppliers.
– Supplier satisfaction in working with the company (on-time payment,
quick responses to info requests, ease of getting new business,
customer integrity).
Purchasing’s organizational dimension 5
The purchasing’s organizational dimension includes the major resources
that are used to achieve the goals & objectives of the purchasing
function:
• Purchasing staff. Related to background, level, training and development,
and competencies of purchasing personnel and its costs.
• Purchasing management
– The way the purchasing department is managed.
– Related to quality and availability of purchasing strategies, action plans
and reporting procedures.
– Related to management style and communication structure.
• Purchasing procedures and guidelines. Availability of procedures and
working instructions for purchasing staff and suppliers to make sure all work
is done in the most efficient manner.
• Purchasing information systems. Efforts made to improve these systems
to support purchasing staff and other employees in daily activities and to
generate management information on activities and performance.
18 Measuring purchasing performance: Five key areas - Examples
Remarks:
1 (i) Each of the five
dimensions can be
measured and
2
evaluated at different
levels of aggregation,
such as:
3
 Line item
 Individual supplier
 Individual buyer

4
Department
 Overall company
(ii) Purchasing
5
performance
measures and
reporting systems
need to be tailored to
the specific needs of a
company!
19 Purchasing budgets, purchasing savings and other performance
measures (1/2)
• The planning cycle within a company starts with setting up the

company’s annual sales plan.
• A budget is the reflection of the resources in quantitative terms
related to the personnel, materials and services that are needed
for the company’s business processes in its broadest sense for a
certain period.
• The purchasing plan usually breaks down into five different sub-
plans:
 Purchased materials budget
 Purchased budget indirect materials
 Investment and supplier tooling budget
 Purchasing departmental budget
• A budget serves as a vehicle for delegating activities and
responsibilities to lower management levels in the organization.
measures (2/2)
• Purchasing materials budget

– Often determines over 50% of the cost price of end products
– Planning and control instrument
– Forecasting volumes of goods and prices
– Frequent meetings between purchasers and production planners
• Purchasing budget indirect materials
– Maintenance equipment, spare parts, office supplies
– Based on historical usage plus a certain margin
• Investment and tooling budget
– Responsibility of management, purchasing has a supporting role
– Based on production plan
• Departmental budget
– Organizational costs based on a fixed amount of employees
measures: Purchasing cost savings – Definition and measures
• Purchasing cost savings

– Cost avoidance: differences in historical and current prices;
without a sustainable character
– Cost reduction: different supplier or change in specification;
sustainable character
→ Points of attention for a cost reduction program

o Clear objectives considering purchasing savings
o Eliminate influences on which purchasing has no influence
o Difference between expected and actual savings
o Independent verification of purchasing savings
measures: Ratios and key performance indicators
• Performance ratios can be classified in different ways (e.g. ratios

related to price/cost, revenue, inventory, availability, innovation/new
product introduction, workforce, supplier performance, operations
and customer satisfaction).
• For practical reasons, we limit our discussion to measures related
to quality and purchasing logistics.
Examples of measurements for the quality of incoming goods and
services are:
– Percentage rejected deliveries related to the number of total deliveries
made.
– Percentage rejected, but repaired goods.
– Cost related to repair of incoming goods and services.
– Line reject rate, due to inferior quality of components.
– Cost related to quality inspection.
– Number of credit notes to suppliers.
– Number of quality claims to suppliers and amounts involved.
measures: Supplier quality index (example)
Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 315.
24 Sarbanes-Oxley and procurement governance (1/2)
• Corporate governance has become a primary concern for firms due to

financial scandals of early 2000.
– The discussion started with “Enron”: leading managers engaged in a
number of malversations to secure their end-of-year bonuses; the
company went bankrupt; also, its accountant, “Arthur Anderson”.
– Political action in the US followed, led by the Senators Sarbanes and
Oxley who proposed strict rules and guidelines for the control and
financial reporting of large int. companies quoted on the stock exchange.
– Also, in Europe similar cases were reported (e.g. Parmalat, Siemens); as
a consequence, European legislation has been strengthened.
• In response to legislation and with reference to the extremely
sensitive purchasing function, companies nominated Chief
Procurement Officers (CPOs).
– A CPO is in charge of orchestrating and organizing all purchasing
processes, procedures and systems throughout the company.
– Business unit managers and line managers are kept responsible for
implementing and deploying these procedures in their domain.
25 Sarbanes-Oxley and procurement governance (2/2)
→ “Set of rules”
• An element of procurement governance is that no invoices are paid
by the company without reference to a purchase number.
• Another element is that ordering, inspection of delivery and
payment cannot be done by one and the same person.
• Part of procurement governance is also that business is awarded to
suppliers using competitive bidding between at least three to five
suppliers.
• Corporate agreements have to be used by business unit managers.
Final remarks:
 Such “set of rules” and guidelines is necessary to achieve full control of the
company’s purchasing processes.
 Whoever keeps an eye on the daily financial press is aware that a lot of
improvement still needs to be made!
26 Purchasing audit as a management tool (1/2)
• Through a purchasing audit, management may assess the extent

to which goals and objectives of the purchasing department are
balanced with its resources.
• The audit must be conducted in such a way that people do not

feel threatened and in a way which builds trust and generates
professionalism.
Audits can be preventive or corrective in nature:

– Preventive audits can be compared with periodical check-ups.
– Corrective audits focus on acute problems apparent in the
functioning of the department (note: this is known in management
consulting as “turnaround management”).
27 Purchasing audit as a management tool (2/2) Remarks:
This figure shows
the elements which
must be included in
a purchasing audit.
The final purchasing
performance is
affected by …
 … requirements
that the corporate
system lays down
for the purchasing
function.
 … changes in the
supply chain of the
company.
 … opportunities
provided by the
supplier market to
fulfill the materials
requirements.
Source: van Weele (1991), p. 131.
28 Purchasing audit as management tool: Aspects to be considered in a
purchasing audit (1/2) – Goals and objectives
Part 1
• Goal orientation
– What are the purchasing department’s goals?
– What are the purchasing department’s responsibilities?
– To what extent are the purchasing department’s tasks stated in objective and
verifiable terms?
• Client orientation
– Does the purchasing department communicate efficiently with its internal
customers?
– Is there adequate reaction to the requirements and wants of the internal
customers?
– Is the purchasing department sufficiently aware of new internal developments and
changes in the supplier market?
• Risk
– What are the major risks with regard to price behavior of high-value items and with
regard to availability of critical materials?
– Is purchasing sufficiently aware of these risks and what measures have been
taken in order to cope with them?
– In general, is continuity of supply and purchasing operations sufficiently
guaranteed?
29 Purchasing audit as management tool: Aspects to be considered in a
purchasing audit (2/2) – Resources
Part 2
• Results and resources
– To what extent does purchasing meet its tasks and objectives?
– Is the purchasing department adequately equipped in terms of people and
systems to be able to meet expectations?
– What measures are taken in order to improve on results on the one hand and
systems and human resources on the other hand?
• Flexibility
– Does purchasing adequately react to changing materials requirements and
internal customer needs?
– Is purchasing sufficiently interested in and pursuing new technology?
– What important changes have taken place in the service and organization of the
purchasing department?
• Management
– Is teamwork within purchasing department sufficiently developed?
– Is the purchasing department a well-respected partner for discussion of internal
customer problems?
– What measures have been taken in order to keep the quality of human resources
up to date?
30 Work order: Integrative case study 13.1 “International Food Industries”
Work order for self-reflection in individual work

-> Now stop this presentation at this point and follow the work order below before
continuing with this presentation further.
1. Please take the textbook* and read through this integrative case study.
2. On this basis, try to understand what is going on in this case study and try to
do the assignment at the end of this case study.
3. Time frame: Take approx. 20 minutes to read and 30-45 minutes to work on
the assignment.
*The full text of this integrative case study you will find on pp. 324-328, in: van Weele, A. (2018), Purchasing and Supply Management, 7th ed.
31 Work order: Integrative case study 13.2 “European Airlines”

3. Time frame: Take 15-20 minutes to read and approx. 30 minutes to work on
the assignment.
32 Work order: Integrative case study 13.3 “Serving the customer at Joycies
Product Ltd.”

3. Time frame: Take approx. 30 minutes to read and 45-60 minutes to work on
the assignment.
33 Brief summary
• Performance measurement in purchasing needs to be considered

as part of the purchasing management process (not in isolation).
• Assessing purchasing varies between companies depending on
the view of management towards purchasing.
• Purchasing performance measurement is important as it leads to
greater visibility and recognition by all other business functions.
• When measuring purchasing performance it’s best to focus on
purchasing effectiveness (extent previously agreed goals are met)
and efficiency (resources needed to realise predetermined
plans/goals).
• Purchasing audits can be used to analyse the purchasing
organization.
• Performance measurement is part of procurement governance.
Without effective procurement governance it is impossible to
control purchasing processes.
34 Lecture 13: Self-assessment (Individual work)
Preliminary remark:
The aim of this exercise is to reflect on the content presented in this
lecture and to prepare for the final exam at an early stage.
Work order:
1. Answer the self-assessment questions given on the following slide(s).
2. Take approx. 15 minutes per question.
Final note: To answer/discuss/reflect on the questions on the following slide(s), please

consult the primary as well as the relevant literature of this course we have listed for you on
the TUGrazTeachCenter learning platform (see: course-detailed view -> further information ->
recommended reading). Of course, you are also welcome to use further sources.
35 Lecture 13: Self-assessment (1/2)
13.1 How would you define purchasing performance? What

performance measures would you suggest using for a purchasing
department of a hospital?
13.2 How would you define purchasing savings for direct and
indirect purchasing spend?
13.3 As a purchasing manager, you want to measure purchasing

cost savings in terms of total cost of ownership rather than
purchasing price. How would you proceed?
36 Lecture 13: Self-assessment (2/2)
13.4 What five indicators would you use to compare your company’s
purchasing performance with that of your main competitors?
13.5 What are the main differences between supplier evaluation and
supplier rating?
Graz University of Technology
37 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk
Purchasing and Supply Management

Lecture 13.
Performance measurement and governance in
purchasing
Prof. Dr. Bernd M. Zunk
Course no. 373.551, 4.5 ECTS, Lecture
Winter Semester 2020/21 (Online)
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition

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Graz University of Technology

1 Institute of Business Economics and Industrial Sociology

Purchasing and Supply Management

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

After this lecture you should understand the following:

The introductory case illustrates that …

• On of the most important factor that influences the way in which

• In general, management may hold one of the following views

(3) Part of integrated logistics. Management becomes aware

Final note: It is almost impossible to develop one uniform method or

Purchasing performance measurement …

Problems related to purchasing performance measurement:

Purchasing performance is considered to be the result of two elements:

→ Purchasing performance thus can be defined as

• There are five dimensions on which measurement and evaluation

• These five dimensions are strongly related with each other… →

This dimension refers to the relationship between standard and

Budgets are important instruments for performance planning and

This dimension refers to purchasing’s responsibility to secure that

• The purchasing logistics dimension refers to purchasing’s role to

→ Supplier evaluation and vendor rating are techniques used to

Supplier relationships can be measured through:

• Operational measures. Monitor the operational relationship with the

• The planning cycle within a company starts with setting up the

• Purchasing materials budget

• Purchasing cost savings

→ Points of attention for a cost reduction program

• Performance ratios can be classified in different ways (e.g. ratios

• Corporate governance has become a primary concern for firms due to

• Through a purchasing audit, management may assess the extent

• The audit must be conducted in such a way that people do not

Audits can be preventive or corrective in nature:

Work order for self-reflection in individual work

Work order for self-reflection in individual work

Work order for self-reflection in individual work

• Performance measurement in purchasing needs to be considered

Final note: To answer/discuss/reflect on the questions on the following slide(s), please

13.1 How would you define purchasing performance? What

13.3 As a purchasing manager, you want to measure purchasing

Purchasing and Supply Management

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

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