Balancing Efficiency and Effectiveness in Procurement

balancing efficiency and effectiveness in procurement

Author: Larry Berglund

As part of the assessment on the ability of a supply chain department to deliver value effectively, is its ability to do so efficiently. Efficiency is realized through many factors: the talent of its staff and the training budget; the governance policies and reporting structures; the budget for resources including equipment; the size of the spend; the operating maturity of the IT system; and other factors such as the strategic objectives set by government oversight, Boards or elected Councils. The latter groups have a strong influence on the priorities to be realized and the time frames for their delivery. Many of these factors may not be directly controlled by the supply chain department, such as the ERP system and its ability to leverage digitalized processes.

To have an objective assessment on efficiency, there should be a set of KPIs or measurement tools to compare. The comparisons should be done year-over-year within the organization or by comparing with other public sector entities of similar size or geographical locations. The comparisons need to have a quantitative component for the cost of the service delivery. Outsourcing procurement services can have an immediate effect on the efficiencies of operations. It could be unfair to compare a procurement department’s efficiencies to those of an outsourced service; however, the comparison would consider the advantages of accessing a more efficient operation provided by a 3rd party service provider. At this juncture, after the outsourcing decision has been made, the comparison then reverts to the effectiveness of the services to meet stakeholder expectations.

Efficiency metrics examples

1.The costs to manage the P-card program. We know that issuing a formal purchase order to buy a low-cost item and make a payment through accounts payable is not a good use of resources. Moving to a P-card program was a first step in efficiency – calculating the cost per transaction gives a sense of the efficiency to administer the program.

Formula: Cost per P-card transaction = average salary x FTEs / total # of transactions per year.

i.e. $65,000 x 1 / 24,000 = $3.38 per transaction for procurement to manage the P-card program. This metric should have an annual review. If the # of transactions increased to 30,000 per year, and no change in staffing levels, this would reduce to $2.71 per transaction. Is this still a reasonable workload for that FTE? Part of the outcome for assessing efficiency is to determine the appropriate level of resources to support the function and the quality of the work, which becomes a benchmark.

2.The internal process time to engage a consultant or a contractor for a routine service. Prequalifications are a very efficient means for the organization to arrange the engagement. It’s surprising how many organizations have not developed a prequal list of service providers based on the category of services required. Setting a target time of within 4-hours of a request, as an example, creates a benchmark to assess the efficiency by procurement to facilitate the process for an end user. The # of hours becomes the target level of efficiency and a benchmark.

3.The return on supply management assets AT Kearney’s ROSMA is a good assessment of efficiency and effectiveness. Leading private sector organizations use ROSMA to look at the value-add by a procurement team but it has applications for public sector as well. The rather simple formula is a strategic indicator of performance combining efficiency and effectiveness.

Formula: The annual cost savings driven by procurement / annual cost of the procurement department.

i.e. A staff of 4 people in the City’s procurement team, with salaries, wages and overhead costs $500,000 per year, attained a $2,500,000 savings in Y1 on various goods and services. This could be from better negotiating on contracts; consolidating the spend; value analysis techniques; material substitution; cost avoidance; or any other quantifiable savings. This would be reported as: 2,500,000 / 500,000 = 5X. In other words, the City is better off having a procurement team which more than covers their costs.

If there was an additional staff member added to the City’s procurement department, at a cost of $60,000 in wages, in Y3 with a savings of $2,750,000, the ROSMA would be: 2,750,000 / 560,000 = 4.9X.  Good but a slight drop in the ROSMA score. The change in return should be studied to determine the cause for the fluctuation. It could be that there was more work from procurement on developing a policy or implementing a new software system. The increase in the number of procurement staff did not translate into direct financial benefits.

4.One challenge with efficiencies is to accurately cost justify the technology investments. For example, moving from a manual process of issuing purchase orders and bid documents to an e-procurement system such as Ariba® or Euna Solutions™. ERP systems are requisite tools in a global market which enable more buyers and sellers to engage in contracting opportunities. However, asking any large public sector or private sector what is their return on investment for their ERP system, the answers are understandably vague or rationalized.

5.Outsourcing of service functions is challenging to cost justify. An owner may be able to reduce its # of full-time staffing component by 90% and have the services provided by a reputable 3rd party. This becomes very efficient and immediately impacts the bottom line in savings. The efficiencies can reduce office space, reduce hiring, reduce on-going training, reduce investment in technology and continuous upgrades, and increase workload capacity. There can be a cost to this apparent efficiency. Outsourcing is usually an exit strategy to offload costs. It can be difficult to take back in-house at a later date, if it fails to be responsive to service requests, affects stakeholder relations, or results in a reduced ROSMA over time. Outsourcing shifts from an efficiency focus to one of relationship management.

Business process improvement is an area where efficiencies can always be found. If it can be measured, it can be improved.

We invite you to checkout our training and service offerings pertaining to public sector procurement.

Author: Larry Berglund

Disclaimer: The views and opinions expressed in this article are those of the Subject Matter Experts and do not necessarily reflect the official policy or position of The Procurement School.

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