Thursday, September 4, 2008

The Big Seven

Recently, I have received a number of requests for help with identifying performance management metrics. Therefore, I wanted to post a few ways to look at performance. Let's start with the company-wide metrics that are often taught in B-school and are affectionately known as "The Big Seven" by students who have suffered through an MBA program.

1. Increase revenue
2. Increase productivity
3. Improve quality
4. Increase customer satisfaction
5. Increase bench strength
6. Reduce costs and waste
7. Reduce cycle and delivery time

In response to a recent LinkedIn Answers question I pointed out that even though these objectives are meant to drive overall organizational performance, they can be applied at all levels. For that particular question I pointed out how six of the seven can be used to measure the value added by a company's purchasing department.

Regardless of location or size, procurement has several significant impacts on the overall organization. If you look at the 'big seven' performance objectives that they teach in US business schools then you can define the impact that supply chain/purchasing/procurement has across a fairly powerful spectrum.
1. Increase Revenue - the Sales team must have the proper resources or they will not succeed. It does not matter if they are both willing and able if they do not have the products to sell or the tools that enable them to make the sale (software, phone system, etc).
2. Increase Productivity - personal productivity relies very heavily on having the right tools at the right time working the right way.
3. Increase Quality - you can imagine the impact that purchasing had on our guests when I worked for Royal Caribbean Cruises. If the strawberries were rotten the entire ship was slammed on the guest comment cards. However, the extremely comfortable mattresses and sheets resulted in praise from everyone.
4. Increase Customer Satisfaction - this is all about procuring the right tools for the job. If the purchasing agent takes the time to understand how the tools are used and what makes one better for the business than another (value) then s/he can have a significant impact by buying a tool that allows employees to delight the customer (e.g. the right content management system will enable the call center to quickly find accurate information when answering customer questions).
5. Improve Bench Strength - internal to your own team you should make sure that you have planned for near-term workforce needs and have developed talent as needed. Your actions as purchasers can only tangentially affect this objective.
6. Reduce Cost - there is more to this that meets the eye. Sure, things can be procured for a low cost, but a very savvy purchasing team can train the entire company on how to negotiate (or not) with vendors. If people who are clueless or corrupt get involved then your vendors can get the upper hand during negotiations and rob your company blind. I have seen several IT people who favored a product erode the company's negotiating position by giving insider information during negotiations. They were not evil, they just really wanted to help the vendor that they felt was clearly best and deserved the most possible money from the company. (As one IT person said, "We have a ton of money so it doesn't really matter.")
7. Reduce Cycle Time - excellent negotiators can get faster computers and more bandwidth for the same price that competitors are paying for inferior products and services. That extra power and speed is a distinct competitive advantage because it cuts down on the overall time to deliver answers. Clearly, just-in-time delivery of raw materials for construction can also improve cycle time by eliminating wait.

Bonus thought: there is an eight performance metric.

8. Increase Market Capitalization - this is effectively the net result of the first seven objectives being met. If you do the first six things right then your company's tangible and intangible value should increase and be justly rewarded by investors.

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