Supplier collaboration has landed on the agenda of Chief Procurement Officers across the globe. According to Deloitte CPO 2019, collaboration is a top priority area of focus for many CPOs in 2020. The momentum of this trend has driven organisations to focus on restructures and strategy development, but the development of KPIs to measure success remains a grey area.
Is Measurement Important?
Absolutely. Measuring impact enables procurement to prove value, encourage buy-in, measure improvements and identify failures. The majority of companies see value from supplier collaboration initiatives, but struggle to accurately track KPIs and attribute returns to particular activities. Metric tracking and success come hand-in-hand for supplier innovation projects, and there are a number of ways success can be measured.
Why is it so difficult?
The definition of innovation is typically determined by its intended outcomes (e.g increasing revenue, entering new markets, improving sustainability). With no universal metric for measuring innovation, strategic priorities often have strong influence on how innovation is measured. For example, the strategic priority for forward thinking functions may be something like “leverage the supplier ecosystem to enter 3 new markets by the end of the year”. In this instance, traditional KPIs (e.g. savings per full time employee) would be inappropriate.
The maturity of collaboration initiatives will also affect the metrics that are most appropriate – as strategies evolve, their metrics must evolve too. Committing to a single metric can be detrimental to the success of collaboration initiatives, while too many metrics means excess time and resources spent measuring and analysing KPIs, and less time on execution.
The matter is complicated, so here’s some advice…
Start with simple metrics that are relatively easy to measure but serve as an early indicator of a valuable initiative. Often these are measures of upstream activities within the supplier innovation value chain like the size of the portfolio of supplier collaboration initiatives and the number of new patents filed over time. Slightly more complex is the estimation of ROI. Understanding the potential value delivery, average implementation and overall success rates of projects enables a high level view of the value of supplier collaboration initiatives to be created.
As initiatives mature, data will help improve the reliability and utility KPIs like estimated ROI. These measures can be tested and iterated on until the set of KPIs that best defines the value of the collaboration initiative is established. On top of this, good supplier collaboration demands cross-functional cooperation, so these early value indicators can secure buy-in from other business units.
Focus On costs
Typically the purpose of collaboration initiatives is to create value that contributes to the top-line, however collaborative relationships are capable of significantly impacting bottom line performance as well. This is true for initiatives that drive efficiency gains, improve productivity and reduce waste. Under these circumstances, KPIs that measure the old school objective of procurement functions (such as cost savings) are useful.
Showing how collaboration can impact the bottom line will help gain support from other members of the procurement function and enable the impact of iterations to the initiative to be monitored.
Measure the Outcomes
A more advanced way of assessing the performance of supplier collaboration is to measure the productivity of collaboration initiative portfolios. Previously mentioned upstream metrics are interesting and work well as early indicators, but they don’t indicate how well supplier collaboration initiatives are being monetised.
Developing KPIs that give a simple measure of conversion (e.g. idea to product) within collaboration initiatives gives a good feel for the overall performance of the program. An example of this is the ratio between R&D spend and the number of new-product sales over time, which essentially means the number of new-product sales per dollar spent on R&D. Another is the ratio of gross margin to new product sales, indicating whether the products created through supplier collaboration are profitable.
Establishing the correct KPIs is challenging due to the intrinsic complexity of supplier collaboration initiatives and a lack of know-how. The key is to keep things simple, stick to what you know, use the data you have and demonstrate value. Adapting these metrics over time will create a set of KPIs that drives the success of the supplier collaboration strategy.