Procurement can be defined as all of the activities required in order to get a product or service from a supplier to the final destination. It encompasses the purchasing function, storing, transportation and management of the relationship between suppliers and internal customers (Van Weele, 1994). Although somewhat different, the term procurement and purchasing are interchangeably used in many business organizations (Dobler and Burt, 1996, 3, Corey, 1978). In this research report, the two are used interchangeably.
Generally, procurement and supply activities are increasingly receiving recognition for their importance to organizations. According to Baily et al (1994), there seems to be a general recognition that purchasing and supply activities contribute in a significant way to the success or failure of an organization.
Procurement’s close link to profitability has been one of the major concerns that have led to the elevation of its status in business. According to the U.S. Bureau of Census (1981), the Procurement function plays an important role in most organizations since purchased parts, components, and supplies typically represent 40 to 60 percent of the sales value of its end products. This means that relatively small cost reductions gained in the purchase of materials or supplies can have a greater impact on profits than equal improvements in other cost-sales areas of the organization (Ballou, op. cit., 1992, p. 546). This has also been re-affirmed by studies done by PIMS Associates who found that purchasing effectiveness is one of the most critical factors in determining the profitability of business (Hillier, 1997).
With the raging wave of globalization and technology development, procurement has become a quite involving process since so many aspects have to be considered before a transaction is concluded. With time, it has grown from a clerical paperwork function concerned with transactional issues to a strategic unit of importance (Syson, 1992). This concurs with the arguments by Dobler and Burt (1996) who noted that procurement has progressed in two paradigm shifts i.e. from internal processes to value adding benefits and a shift from tactical to strategic focus.
According to (Gadde and Hakansson- quoted in Knudsen, 1999) procurement, as a strategic function play three roles: the development role, the rationalization role and the structural role.
The development role stresses the importance of using suppliers as an essential resource in the product development process. This is done by systematically matching the buyer’s own need with the capabilities of the supplier’s research and development capabilities. By so doing considerable synergy effects are reached.
The rationalization role encompasses all activities aimed at reducing costs. This is done by cutting prices through internal coordination, superior negotiation techniques, concentrating purchases to fewer suppliers leading to economy of scale, reducing stock levels and adapting to one’s own needs to what suppliers can offer. The same is also achieved by changing internal customer needs, improving flows between suppliers and internal customers or finding better or less expensive suppliers.
The structural role emphasizes that the decisions made in the purchasing work today affect the structure of possible suppliers available in the future.
Whether strategic or clerical, the position of procurement in an organization depends on quite a number of factors. Van Weele (1994) lists some of these factors as characteristics of the product; strategic importance of the purchase function; sum of money involved in the purchase; characteristics of the purchase market; degree of risk related to the purchase; degree to which the purchase affects existing routines in the organization; role of the purchasing department in the organization.
2.2 The Concept of Performance Management
According to Latham, (1984), performance management is defined as the cyclical, year-round process in which managers and employees work together on setting expectations. It includes activities to ensure that goals are consistently being met in an effective and efficient manner (McNamara, 2000). According to McNamara, Performance management can focus on 7 performance of the organization, a department, processes to build a product or service, employees, etc.
MacNamara notes that because performance management strives to optimize results and alignment of all subsystems to achieve the overall results of the organization, any focus of performance management within a company (whether on department, process, employees, etc.) should ultimately affect overall organizational performance management.
Achieving the overall company goals requires several ongoing activities, including identification and prioritization of desired results, establishing means to measure progress toward those results, setting standards for assessing how good results were achieved, tracking and measuring progress toward results, exchanging ongoing feedback among those participants working to achieve results, at time to time reviewing progress, reinforcing activities that achieve results and intervening to improve progress where necessary. This requires an elaborate performance measurement using an appropriate performance measurement system. The overall goal of performance measurement being to ensure that the organization and all of its subsystems (processes, departments, teams, employees, etc.) are working together in an optimum fashion to achieve the results desired by the organization.
2.3 Performance measurement
According to Nelly (1998), performance measurement is the process of quantifying the efficiency and effectiveness of past action. It is the gathering of information about the work effectiveness and productivity of individuals, groups, and larger Organizational units (Larsen & Callahan, 1990). It involves systematically collecting and strategically using information, on an ongoing basis, in an intra- and inter-organizational fashion, and for a variety of internal and external purposes (Dusenbury, 2000).
Performance measurement represents a process where the focus is on the internal process of quantifying the effectiveness and the efficiency of action with a set of metrics (Neely, Gregory and Platts, 1995). It represents management and control systems that produce information to be shared with internal and external users. Furthermore, as it encompasses all aspects of the 8 business management cycle, it constitutes a process for developing and deploying performance direction (Nanni, Dixon and Vollmann 1992). In the past,
Performance measurement was viewed as an element of the planning and control cycle that captures performance data, enables control feedback, influences work behavior (Flamholtz, Das and Tsui 1985) and monitors strategy implementation (Simons 1990).
From the foregoing it is apparent that performance measurement is concerned with an organization/ department’s efficiency and effectives. According to Nelly (1998) an organization’s efficiency and effectiveness are two most fundamental dimensions of performance and hence those two must be measured.
Efficiency refers to how economically the organization’s resources are utilized whereas effectiveness refers to how accurately the organization’s products or services satisfy the customer’s needs. Efficiency measures how successfully the inputs have been transformed into outputs whereas Effectiveness measures how successfully the system achieves its desired outputs (Oxford Dictionary of Business, 1996).
2.4 Importance of performance measurement
Performance measurement plays a key role in the development of strategic plans and evaluating the achievement of organizational objectives (Ittner and Larcker 1998) as well as acting as a signaling and learning device (Simons 1990).
More than a diagnostic system, performance measurement also represents an interactive device (Simons 1990). It contributes to strategy formulation and implementation by revealing the links between goals, strategy, lag and lead indicators (Kaplan and Norton 1996) and subsequently communicates and operationalizes strategic priorities (Nanni et al. 1992).
The goal of making measurements is to allow managers to see their company more clearly – from many perspectives – and hence to make wiser long-term decisions. According to the Baldrige Award scheme (Baldrige Criteria, 1997), Modem businesses depend upon measurement and analysis of performance for it supports a variety of company purposes, such as planning, 9 reviewing company performance, improving operations, and comparing company performance with competitors or with ‘best practices’ benchmarks.
Performance measures assist companies to evaluate, control and improve production processes. They are also used to compare the performance of different organizations, plants, departments, teams and individuals and also assess employees (Heim and Compton, 1992).
According to the Foundation of Manufacturing Committee of the National Academy of Engineering, world class organizations use performance metrics to define and align performance expectations for the organization (quoted in Heim and Compton, 1992 pp.6).
2.5 Performance measurement systems
According to Ljungberg (1994) a measurement system is a set of related measures described by rules and procedures for capture, compilation and combination of data- that in combination reflect key performances and characteristics of a selected process effectively enough to admit intelligent analysis leading to action if needed.
On his part Simons, (2000) defines Performance management systems as “the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities”. These systems focus on taking financial and non-financial information that influence decision-making and managerial action. The recording, analyzing, and distributing of this information is embedded in the rhythm of the organization and is often based on predetermined practices at preset times in the business cycle.
A performance measurement system allows informed decisions to be made and actions to be taken because it quantifies the efficiency and effectiveness of past actions through the acquisition, collation, sorting, analysis, interpretation and dissemination of appropriate data (Nelly, 1998).
A performance measurement system works with comprehensive and carefully selected performance indicators. Performance indicators specify the types of evidence, qualitative and quantitative, used to assess performance and results. These will include indicators of productivity, effectiveness, quality, timeliness, and responsiveness (Wholey, 1983).
2.6 Trends in performance measurement Systems
Performance measurement is not a new phenomenon. In fact throughout history, performance measures have been used to assess the success of organizations. For instance, the modem accounting framework dates back to the Middle Ages and since that time assessment of performance has predominantly been based on financial criteria (Bruns, 1998). Double entry accounting systems were implemented to avoid disagreement and settle transactions between traders (Johnson, 1983). By the start of the twentieth century, the nature of organizations had evolved and ownership and management were increasingly separated. Thus, measures of returns on Investment were applied so that owners could monitor the performance that managers were achieving (Johnson, 1983). Since that time, the vast majority of performance measures used have been financial measures of this type based on financial data like return on investment, Return on sales, price variances, and sales per employee and profit per unit of production. Of these measures, productivity has been considered the primary indicator of performance, (Teague and Eilon, 1973).
By the 1980s, there was a growing realization that the traditional performance measures (measures based on accounting parameters) were no longer sufficient to manage organizations competing in modem markets (Johnson and Kaplan, 1987).