What is performance management definition and how to apply it to the procurement function?

Performance management definition procurement
May 23th, 2023
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Every company needs to optimise its performance to remain competitive. Among the many initiatives for continuous improvement is corporate performance management. This approach is designed to identify, measure and develop employee performance in order to achieve the company’s strategic goals. It applies to all levels of the organisation, including the procurement function.

The definition of performance management

By definition, performance management has one goal: Making sure that the company performs well, across its departments, employees and processes.

Central to this approach is the way managers use its principles to align corporate strategic objectives with their departments’ and teams’ objectives so they can improve efficiency, productivity and profitability.

The first step in performance management is to define performance in relation to each business strategy. The idea is to translate this notion into strategic objectives, and then into individual objectives that will form the basis for each team’s everyday work. This means setting up a performance management system to measure and monitor the company’s efficiency to get the best out of each employee.

Echoing Lean philosophy, performance management has many benefits:

  • Increase in sales;
  • Cost reduction;
  • Improvement of managerial relations;
  • Increase in team engagement and satisfaction;
  • Etc.

The main principles of performance management

There are five key principles for effective performance management.

Explain expectations

Employees’ goals have to be formalised intelligibly for this progress policy to work. This means you need clear objectives, precise job descriptions, and a transparent evaluation checklist. This is the only way to ensure every employee knows how to achieve optimal performance.

Jointly define KPIs

It is important that management works out the key performance indicators in agreement with the main parties involved, i.e., the teams. These KPIs will be SMART: Specific, measurable, ambitious, realistic and time-bound.

You must also remember that they may change over time, depending on circumstances.

Provide regular feedback

Performance management requires a good deal of communication. Regular feedback ensures that the employees have understood the objectives and are moving in the right direction. This also enables them to assess their progress and to solve any problems quickly if necessary.

Foster mutual trust

Employees must be sufficiently autonomous to be fully effective. They need to be able to make key decisions and feel empowered. As such, the company must introduce the right to make mistakes. This is crucial for the teams to progress.

Upgrade skills

Continuous learning is central to performance management and employee development. Throughout the year, employees are encouraged to develop their skills. For that, they need access to a whole range of training courses, a working environment that is suited to their needs, time for creativity, etc.

Applying performance management to procurement

When applied to the procurement function, there is a risk of assessing performance management based purely on savings or other strictly quantitative aspects. However, procurement performance requires a lot more to be in line with Lean Purchasing.

Historically, procurement performance appraisal relied on three criteria:

  • Costs;
  • Deadlines;
  • Quality.

However, the procurement function now faces new strategic challenges. Other dimensions of procurement performance must also be introduced, namely:

  • Relationship with suppliers;
  • Internal customer satisfaction;
  • Corporate social responsibility.

Each of these criteria is associated with tools and key performance indicators to measure the results, as well as the resources used to achieve them. For example, procurement departments can monitor product compliance, supplier payment times, internal satisfaction, supplier visits, etc.

It is important to cover all three dimensions:
> Quantitative, i.e., the impact on the financial result;
> Qualitative, which is the added value of the purchases;
> Human resources, reflecting the involvement and loyalty of the people involved.

Through implementing dashboards or reporting tools, managers can monitor the level of performance and get support from a real decision-making aid. This is how procurement departments can identify priorities and adapt the resources allocated.

Performance management is an ongoing process to drive procurement teams towards excellence. It is an impressive process, enabling you to adopt a common vision for the overall success of the company.