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Purchasing Performance Management Systems and Strategy:

classification of KPIs and empirical analysis


Caniato F.1, Luzzini D.1*, Ronchi S.1

Politecnico di Milano School of Management, Piazza Leonardo da Vinci 32, 20133, Milano

* Corresponding author

Keywords: Purchasing, Key Performance Indicators, Strategy


Abstract
This working paper investigates the topic of purchasing performance management and its
relationship with purchasing strategy. A hierarchical classification framework for purchasing
Key Performance Indicators is proposed, linking overall purchasing performances perceived
by the internal customer to their determinants, i.e. internal purchasing processes and
suppliers performances. Subsequently, 8 case studies in large multinational organizations are
analyzed, in order to investigate the relationship between purchasing strategies and
performance management systems. Results show different stages of development of such
systems and in general a higher focus on traditional performances such as cost, quality and
time. Less diffused are indicators related to flexibility, innovation and corporate social
responsibility, despite the relevance of such performances in todays competitive
environment.
Introduction
Several authors accounted, in recent years, for the strategic importance and the competitive
potential of purchasing (among others: Reck and Long, 1988; Pearson and Gritzmacher,
1990; Spekman et al., 1992; Welch and Nayak, 1992; Gadde and Hakansson, 1994; Carter
and Narasimhan, 1996; Anderson and Katz, 1998).
For this reason, it is clear why purchasing performances have a direct impact on overall
company results, and therefore they need to be accurately measured and monitored through
appropriate Performance Management Systems (Monczka et al., 2005; van Weele, 2005).
This paper aims at classifying purchasing Key Performance Indicators (KPI) and to
investigate the link between purchasing strategy and KPIs. The research is based on in-depth
case studies in large organizations coming from different industries, in order to explore the
state of the art of both research and practice. The paper is structured as follows: at first, the
research background in terms of both purchasing strategy and performance management
system is presented. Research objective and methodology are then presented, subsequently
findings are discussed and finally conclusions are drawn.

Research Background
Since the purchasing process is gaining a pivotal role within more and more companies, a
general and comprehensive framework for conducting research on Purchasing and Supply
Management (PSM) was needed. The intuition we followed was to apply a widely agreed and
tested OM (Operations Management) model to the purchasing area, following Harland et al.
(1999) and Gonzalez-Benito (2007). These authors extended the OM models of Hayes and
Wheelwright (1984) and Vickery (1991) to the PSM domain.
According to this research framework the purchasing strategy is directly influenced by the
overall business strategy. Many authors discussed the link between business and purchasing
strategy: Cousins (2005); Nollet, Ponce, Campbell (2005); Morgan and Monczka (2003);
Cavinato (1999); Cox and Lamming (1997); Cox (1996); Ellram and Carr (1994); Rajagopal
and Bernard (1993)). Cousins, in particular, observes that beside the purchasing strategy, the
role and the power of the purchasing department itself within the organization is directly
linked to the corporate strategy.
Looking at Cousins (2005), but also at Hayes and Wheelwright (1984), Schroeder et al.
(1986) and Miller and Roth (1994), the term purchasing strategy might be defined as:
Set of practices and managerial levers put in place by the Purchasing Department in order to
pursue its objectives and competitive priorities; those objectives and competitive priorities
must be defined coherently with the overall corporate strategy.
Practices and managerial levers might be classified according to four main dimensions (Dong
et al., 2001; Nollet and Beaulieu, 2005; Krause and Ellram, 1997; Lamming, 1993; Min and
Galle, 2001): organization, processes, tools, and suppliers relationships. Each of these
dimensions includes many different decisions that might be made by the Purchasing
Department.
Competitive priorities have been first listed by Hayes and Wheelwright (1984) and then
completed by Ward et al. (1990). The basic typologies of competitive priorities are: cost,
quality, time, flexibility and innovation. These authors state that studying and defining
competitive priorities is crucial in understanding purchasing strategy within a company.
Given such a strategic role of purchasing strategy inside a company, performance
measurement becomes critical to manage this area coherently with the overall corporate
strategy. The evaluation of purchasing activities is crucial for a number of reasons (Monczka
et al., 2005; van Weele, 2005). It supports better decision making processes based on
strategies and obtained results; it supports the communication of objectives and
responsibilities across the purchasing organization; it drives peoples behaviors and actions
through motivation and feed-backs on their results; finally, it allows possible benchmarks
with other companies, at least on general levels.
A Performance Management System (PMS) might be defined as an integrated and dynamic
system designed to support decision making processes by collecting, elaborating and
analyzing pieces of information (Neely et al., 2000). Generally speaking, in the last twenty
years a revolution in the field of PMS took place (Johnson and Kaplan, 1987; Neely et al.,
2000) as a consequence of markets evolution. Old accounting systems were no more suitable
for modern contexts based on new assumptions. Traditional economic and financial indicators
started to be discussed at the end of the 80s (Neely et al., 1995). Quality, customers
satisfaction, flexibility and innovation are examples of new performances that need to be
measured as well.

Following this trend many different models have been developed: Performance Measurement
Matrix (Keegan et al., 1989); Resources and Determinant Frameworks (Fitgerald et al., 1991);
Macro Process Model (Brown, 1996); Balanced Scorecard (Kaplan and Norton, 1992);
Performance Prism (Neely, 2000); Hierarchical Models (Lynch and Cross, 1991).
It is quite evident that literature about Performance Measurement Systems in general is huge,
but it is limited about Purchasing PMS (Kumar et al., 2005). Out of 305 papers focused on
Purchasing we scouted, only 12% of them deals with PMS within purchasing.
First contributions related to Purchasing PMS were published in the beginning of the last
century (Gushee and Boffey, 1928; Lewis, 1933). The first research was focused on the fixed
cost of labor related to personnel involved in purchasing activities. The second one was more
focused on the inputs costs and their impacts on the cost of the final products. Although quite
trivial and limited, those contributions highlighted two major components that are still
debated in PMS: efficiency and effectiveness. In the end of the last century and especially in
the last years the Purchasing Department increased in importance and some authors proposed
more sophisticated models.
Chao (Chao et al., 1993) identifies ten key performance indicators for the Purchasing
Department, among which on-time deliveries, accuracy, quality, professionalism Knudsen
(Knudsen, 1999) elaborates a Purchasing PMS based on purchasing processes thus involving
different actors such as the Purchasing Department, suppliers and internal customers.
Axelsson (Axelsson et al., 2002) introduces in their balance scorecard new classes of
performances including the overall Purchasing Department, its impact on the company
organization, the single products and the total cost of ownership for each product or internal
customer. An interesting contribution has been developed by Easton (Easton et al., 2002). It is
based on data development analysis (DEA) and introduces one single indicator measuring the
total efficiency of the Purchasing Department. This indicator is given by the ratio between a
general output (including total spending and percentage of that spending directly managed by
the Purchasing Department) and a general input (including operational costs of the Purchasing
Department, number of purchasing professionals, administrative personnel within the
Department, and number of active suppliers). Rafele (Rafele, 2004) considers the Purchasing
Department as a service center and measures its performance according to tangible
components, execution modes and information flows. Kumar (Kumar et al., 2005) develops a
PMS based on supply links, including the Purchasing Department, suppliers, internal
customers and the relationships existing among them. Van Weele (van Weele, 2005) roots his
approach in the original effectiveness and efficiency criteria, measuring the effectiveness
through price/cost, quality and logistics, and the efficiency through organizational aspects.
Finally, Carter (Carter et al., 2005) proposes one of the most complete approach designing a
balance scorecard including nine categories of indicators, ranging from cost to availability,
from quality to internal customer satisfaction.
Objectives and methodology
Based on the contributions discussed so far, we focused our research on purchasing strategies
and performance measurement systems investigating relationships between these two areas.
Therefore the paper has two main objectives:
1. The first one is to identify purchasing key performance indicators (KPI) and to
classify them according to specific performance areas.
On the base of existing literature, we aim at gathering a list of existing KPIs for purchasing
and to classify them according the performance area they refer to (i.e. quality, cost, time,
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flexibility, innovation and corporate social responsibility). Besides, we aim at developing a


hierarchical structure for KPI, in order to link overall performances with their determinants, in
a sort of KPI tree.
2. The second one is to investigate the link between purchasing competitive priorities,
strategies and performance management system.
Given the strategic relevance of purchasing previously discussed, we aim at investigating the
relationship between purchasing competitive priorities (i.e. strategic goals for purchasing),
purchasing strategies (i.e. sets of practices) and the performance management system (i.e.
KPIs).
In order to pursue objective 1, literature review was the main source for the identification of
almost a hundred of KPIs and the relevant classification dimensions. We classified 305
scientific papers focused on purchasing management and published between 1996 and 2007,
mainly coming from the following journals: Journal of Operations Management (15%),
International Journal of Operations and Production Management (11%), Supply Chain
Management: an International Journal (31%), Journal of Purchasing and Supply Management
(29%). Among these, almost 60 papers specifically regarded the topic of performance
measurement.
In order to pursue objective 2 instead, empirical case studies was the methodology we
selected, in order to gather an in-depth understanding of how firms are actually structuring
their purchasing performance management systems in order to sustain purchasing strategy.
We selected companies from different business sectors in order to identify and compare
different strategies and performance indicators adopted by their purchasing functions. We
studied 8 firms, which were selected according to the following criteria: they are large,
multinational organizations, for which purchasing is highly relevant in terms of both total
spending and impact on final performance. We based our conclusions on industrial
companies, rather than service one, in order to stay focused. The sample is described in Table
1. The multiple-case-study methodology has been retrospective and mainly aimed at
exploration (as for the first objective) and explanation (as for the second one). Different
industries have been chosen to assure theoretical replication.

Case

Sector

Turnover
(world, mln )

Employees
(world)

Interviewee

Company A

Aerospace

182

1,800

Purchasing Marketing,
Planning and Reporting
Manager

Company B

Distribution

34,990

168,100

Food Purchasing
Manager and
Management Control
Manager

Company C

Catering and retail

4,000

70,000

Purchasing Manager

Company D

Pharmaceuticals

29,000

105,000

Purchasing Manager

Company E

Oil and Gas

86,105

73,000

Purchasing Control,
planning, reporting and
marketing intelligence
Manager

Company F

Home and Personal


Care

12,740

51,000

Purchasing Director

Company G

Food

1,647

14,000

Purchasing Manager

Company H

Steel

1,054

3,000

General Manager of the


Purchasing Company

Table 1. The sample (2006 data)

Findings: purchasing strategies and key performance indicators


The research has investigated purchasing strategies and performance measurement systems in
8 case studies. Table 2 provides a brief synthesis of key information for each case.
In particular, we analyzed purchasing strategies in terms of competitive priorities and main
practices. As discussed in the literature review, practices and managerial levers have been
described in terms of organization, processes, tools and techniques, and suppliers
relationships. As it is not possible to include all relevant information, only major aspects have
been included in the table.
For each company we then studied the PMS put in place considering motivations and main
KPIs used both internally and to evaluate suppliers.
In order to go deeper in the PMS analysis, we tried to develop and apply to each case a KPIs
classification based on the literature review previously discussed and systems adopted by
companies in the sample.
Purchasing performances are clustered in six major categories; within each category we
identified many different indicators.

Cost: the cost component is of course one of the most important performances to e
measured. By cost we do not consider only the purchasing price, but all cost
components that might be due to the purchasing activity (e.g. total cost of ownership),
including the purchasing price, transaction costs, process and personnel costs.

Time: it is important the Purchasing Department provides the service required within
the time frame defined, being punctual and dependable.

Quality: of course also quality is a crucial factor, in terms of technological quality,


compliance, service quality and customer satisfaction.

Flexibility: in the last years flexibility has become more and more important. Being
flexible means being able to respond to variations in terms of volumes required by the
internal customer, technical specifications and lead times.

Innovation: Purchasing Department is more and more required to scout for new
solutions and new suppliers in order to support the innovation processes of the
company. For this reason professional buyers might also be involved in research and
development projects.

Corporate Social Responsibility: recently the attention on the society and the
environment has increased a lot. It is not by chance that many companies are
becoming responsible for their entire supply chain thus increasing the spot lights on
purchasing activities and suppliers selection.

Company A
Competitive Priorities

Organization

Processes
Practices

PMS

Company E

Company C

Company F

Company H

Company B

Cost, quality,
service, internal
customer
satisfaction

Cost, feeding
production and
supporting its
flexibility

TCO, efficiency,
lead time, quality

Innovation,
differentiation,
quality/price ratio

Profitability,
quality,
differentiation

Delivery, quality,
cost, innovation

Sales, profitability

Reporting to the
COO, grouped by
commodities

Reporting to the
CEO, grouped by
commodities

Reporting to the
CEO, grouped by
commodities

Reporting to the
CEO, hybrid
organization

Reporting to the
CEO, integration
with Marketing,
grouped by
commodities

Reporting to the
CEO, hybrid
organization

Central
independent entity
buying for the
Group, hybrid
organization

Referring to the
COO, grouped by
commodities

Purchasing
processes for the
company, not for
the Group

Centralization,
reduction of low
value added
activities

Centralization,
Internal customer
orientation, reverse
marketing

Planning, central
policies and
decentralization,
reverse marketing

Offer definition for


the retail, reverse
marketing

Centralization,
reverse marketing,
off-shoring

Centralization,
reverse marketing,
internal customer
orientation

Centralization,
competition
analysis

eProcurement,
vendor rating

ePurchasing,
operational and
strategic vendor
rating, frame
agreements

Vendor rating, JIT


with suppliers

ePurchasing,
vendor lists,
vendor rating,
frame agreements,
SLA

Vendor rating,
suppliers
qualification,
ePurchasing

eProcurement,
vendor rating,
VMI, suppliers
qualification, self
invoicing

ePurchasing,
vendor rating

EDI, JIT with


suppliers

Large suppliers,
collaboration and
early supplier
involvement

Supply base
reduction, early
supplier
involvement

Multiple sourcing,
partnerships with
key suppliers, early
supplier
involvement

Partnerships, early
supplier
involvement, codesign

Partnerships,
supply base
reduction

Partnerships

Early supplier
involvement,
suppliers
qualification

Suppliers
qualification, spot
and long term
agreements

Recently
developed with
control and
improvement
purposes

Implemented for
20 years with
evaluation and
communication
purposes

Developed 4 years
ago for
improvement
purposes

Developed 6 years
ago for evaluation,
control and
improvement
purposes

Implemented for
25 years for
internal
communication,
evaluation and
control purposes

Recently
developed for
measurement and
communication
purposes

Implemented for 7
years for decision
making purposes

Implemented for 7
years for
motivation,
evaluation and
communication
purposes

Budget vs. actual,


savings,
punctuality

Savings, budget
compliance, no. of
suppliers, no. of
orders,
eProcurement
compliance,
customer satisf.

Costs, suppliers
turnover

Savings, lead time,


Department costs,
service

Sales, margin,
inventories

Savings, number of
suppliers, %
spending in lowcost countries

Lead time, price


variance

Sales, net profit,


cash flow

Quality, delivery,
promptness

Cost, quality,
delivery,
promptness,
innovation, service

Service, quality,
lead time

Competitiveness,
quality,
punctuality,
supplier behavior

Quality,
punctuality,
compliance, price,
innovation, soc. &
env. sustainability

Punctuality,
compliance,
innovation, soc. &
env. sustainability

Lead time, price,


quality

Quality, price

Main KPIs

Main suppliers KPIs

Company G

Cost as order
winner, quality and
innovation as
qualifiers

Tools

Suppliers
Relationships

Company D

Table 2. Summary of case studies.

Figure 1. Purchasing KPIs model.


Company
Performance
Purchasing Performance

Cost

Time

Quality

Flexibility

Innovation

Internal
Processes

CSR

Suppliers

Cost

Time

Cost

Time

Quality

Flexibility

Quality

Flexibility

Innovation

CSR

Innovation

CSR

Each of these categories is not related to activities going on merely within the internal boundaries of
companies; it is more and more influenced by suppliers actions. With the increment of outsourcing
practices this is becoming a crucial issue. For this reason it is useful to define sets of indicators both
internal and external for each category. The final result is represented in Figure 1. Overall
purchasing performances are caused by internal processes within the company and external
processes managed on the suppliers side. For instance, the total lead-time from a Request for
Purchase to the order fulfillment is a composition of scouting time, supplier lead-time and internal
order processing time.
Therefore KPIs within those 6 categories need to be measured at different levels:

Purchasing Performance: measuring the overall performance as perceived by the internal


customer;

Internal Processes: measuring the performance of the internal processes;

Suppliers: measuring the performance of suppliers.

Table 3 represents more in detail the PMS adopted by each company within the sample, showing
exactly which part of the model is measured through specific KPIs.
A preliminary overview shows that most measured KPIs are those related to quality provided by
suppliers, time due to suppliers processes and overall purchasing costs. Cost related to suppliers,
which might be seen as the purchasing price paid for products or services is the other relevant set of
indicators used by companies.
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A shows the most recent application of PMS within the sample, for this reason it is among the
simplest ones. Coherently with competitive priorities the only purchasing performance being
measured is cost. However, dealing with suppliers, time and quality are the measured performances.
This is coherent with the industry and the practice of selecting mainly large and reliable suppliers
for strategic components. Considering the specific industry, it is surprising A is not using any
indicators related to innovation; probably this is related to the fact they have recently implemented a
PMS for purchasing activity and it will be further developed in the future.
The Purchasing Department in Company D is characterized by a great relevance, this is explained
by the direct relationship with the CEO, as in many other cases, and the 20 years experience in
using PMS. Cost and quality are the two most important performances being measured; this is
coherent with the organization grouped by commodities. Supply base management is a key strategic
factor for Company D; this is shown by its reduction, early supplier involvement in research and
development activities and the number of indicators used to evaluate suppliers (cost, time, quality
and innovation). As a matter of fact supply base contribution to innovation is crucial in the
pharmaceutical industry. Although purchasing activities and processes seem to be well managed,
the company should try to evaluate also internal processes performance, something which is not
done yet.
Although the organizational relevance of the Purchasing Department in Company G is quite high,
they have introduced a PMS only in the last 4 years. The major concern in this case is supporting
the Production Department in the most efficient and flexible way as possible. This is coherent with
the JIT relationship with key suppliers and KPIs regarding costs both internally and at the overall
purchasing performance level. As suppliers have high impact on the final products, Company G
keeps switching costs quite low in order to select always the best quality. This is coherent with time
(including service level) and quality KPIs. As a flexible support to production is one of the major
priorities, the company should also try to consider those kind of KPIs in its PMS.
Also in Company E the Purchasing Department has a relevant role; it adopts one of the most
complete PMS in the sample, measuring KPIs at different levels (purchasing performance, internal
processes, suppliers). Cost, time and quality KPIs are totally compliant with strategic priorities. It is
surprising Company E does not measure any KPIs related to innovation, but probably in the
engineering and construction industry innovation in purchasing activities is less critical than in the
aeronautical or in the pharmaceutical industries.
Company C presents the most advanced, complete and mature PMS within the sample, it is 25 years
old. The core business of Company C is marketing and services to final consumers; it is not by
chance that the Purchasing Department is integrated in the Marketing Department: what they buy
goes directly into consumers hands. For this reason major KPIs are also measuring innovation and
differentiation provided by suppliers. As a matter of fact the company might be seen also as a
distributor, this is the reason why cost (directly impacting on margin), time, overall flexibility and
quality are well measured. Also the use of KPIs related to social and environment responsibility
might be explained by the strong marketing orientation.
Company F has recently developed a PMS for purchasing activities. Measured KPIs are coherent
with strategic priorities: quality, innovation leading to higher differentiation and cost leading to
higher profitability. Also the hybrid organization (both functional related to commodities and
divisional related to markets) is coherent with the specific industry and the need to be close to
customers. Also in this case corporate social responsibility of suppliers is considered as relevant.
Probably due to its recent development the PMS does not measure anything related to internal
processes yet.
Company H has created its own company for managing purchasing activities for all the Group
worldwide. Its hybrid organization shows the customer orientation towards the companies within
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the Group. Time, cost and quality KPIs at different levels are compliant with strategic priorities. It
is the only case using one specific internal indicator that might be related to CSR: they measure
punctuality of payments to suppliers. Considering the competitive focus on innovation some
important KPIs related to innovation at different levels are missing.
The Purchasing Department in Company B reports to the COO and it is organized by commodities.
This organizational configuration is coherent with competitive priorities related to sales and profit.
As a matter of fact Company B is a reseller and the relationship between sales and purchases is
crucial in terms of profit. Cost and quality are the two most important KPIs being measured; also
the overall flexibility is relevant in terms of service level delivered to customers. Internal
purchasing processes are not measured.
Conclusions
We can conclude that both our research objectives have been achieved, since we have proposed a
comprehensive framework for classifying purchasing KPIs and analyzed how performance
management systems are deployed in real practice and how they relate to purchasing strategy.
In particular we have highlighted how overall purchasing KPIs, which refer to the performances
perceived by the internal customer, derive from the combination of both internal processes and
suppliers performances. This is important for research, since such a framework helps in providing
a systemic view of purchasing performance, coherently with overall company strategy. And this is
important for practitioners also, since they can use is as a reference and a guide to develop or refine
the performance management system for their organizations.
The case studies have also provided rich insights on how companies are actually implementing such
systems: first of all we noticed that in some cases (in particular retail and distribution) performance
management systems for purchasing are consolidated since long time, while in others, despite the
relevance of purchasing, have been developed only recently and are still a work in progress. In
particular, the most common performance areas considered are the traditional cost, quality and time,
while flexibility, innovation and corporate social responsibility are less diffused. This appears to be
not completely aligned with corporate strategies, since there is wide agreement on the growing
today of flexibility, innovation and corporate social responsibility in order to survive and succeed
today, while quality, cost and time and more and more perceived as market qualifiers, not order
winners. This result can be partly explained by the greater difficulty in measuring more innovative
performances and in by the inertia of large organizations in modifying their ways of operating, as
well as by the concern for the proliferation of KPIs. We claim also this result to be interesting for
both research and practice, since on the one hand there is the need to consolidate measures for
flexibility, innovation and corporate social responsibility in purchasing, and on the other hand
managers should take into greater consideration such KPIs in their performance management
systems.

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Company A

Company D

Company G

Company E

Cost
Time
Purchasing
Performance

Quality
Flexibility
Innovation
CSR
Cost
Time

Internal
Processes

Quality
Flexibility
Innovation
CSR
Cost
Time

Suppliers

Quality
Flexibility
Innovation
CSR
Table 3. KPIs analysis.

11

Company C

Company F

Company H

Company B

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