How to Pay Purchasing or Supply Chain Professionals – Market Basket Focus Areas

How to Pay Purchasing or Supply Chain Professionals – Market Basket Focus Areas

By Dr. Tom DePaoli

Jack Welch once noted that the only two departments that drive revenue directly to the bottom line are sales and purchasing.  He noted that the other departments were basically overhead. I would also include supply chain professionals in this revenue generating group.

The dilemma that we have is how should organizations pay the revenue generating departments of purchasing or the supply chain? Sales departments are often incentivized with bonus-based pay based on sales volume, increases in market share or new customers gained. Should we pay them similar to sales? Not so fast.

For purchasing and supply chain professionals it is much more complicated but revenue growth or hard savings must at least guide their pay or compensation system. There are other multiple focus areas of importance that organizations can base their compensation systems on for these groups. There is not a shortage of focus areas to help select how to judge compensation for purchasing or supply chain professionals. Quite the opposite there are almost too many! My first point is that when the focus areas are selected to judge compensation are selected, they should be aligned to the organizations overall vision and mission statement and current market conditions the organization is facing.  They should vary year to year based on conditions and circumstances. In the dynamic departments of purchasing and the supply chain, the worst choice would be to select a system that is inflexible and outdated. I recommend a focus area market basket approach and for simplicity no more than five focus areas. The list available is large.

The most important step is to get another department such as finance or accounting to agree to the definition of the focus areas and the criteria.

Here are some focus areas to consider:

Hard Savings

1. Hard savings include actual price reductions, reductions in freight costs, reduction in lifecycle costs, reduction in internal labor costs, reduction in transaction costs, reductions in consumption or waste, cost avoidance, Reduction in unit cost of operations
2. Reduction in unit cost of production
3. Reduction in transaction cost
4. Reduction in overhead cost
5. Reduction in transportation cost
6. Reduction in manpower
7. Increased throughput, resulting in increased sales or revenue

Soft Savings

1.     Reduction in process rime

2.     Reduction in need for working capital

3.     Avoidance of capacity enhancement

4.     Conformation to changes in the law

5.     Increased safety in the workplace

6.     Increased employee satisfaction

7.     Increased customer satisfaction

8.     Relationships building, improving collaborative venture with suppliers, sharing computer systems and improving communications

9.     Process improvement, reduction in process steps and time to market, Increased product quality due to use of best practice standards -- more appropriate requirements, design, and code reviews; more effective testing; etc.

10.  More effective governance, portfolio management, time tracking, project management, cost management, and resource allocation

11.  More upfront involvement of key stakeholders who can provide earlier feedback

12.  Improved scheduling and forecasting as part of capacity and demand management

13.  Improved service support and service delivery to end-users

14.  Better vendor management

15.  Faster on-boarding of new personnel

16.  Reduced time spent in meetings

17.  Reduced design and re-work time

18.  Fewer process disputes between in-house staff and third-party vendors

19.  Less time spent finding templates and researching how to do things

20.  Fewer misunderstandings between different teams, sites, cultures, and languages

21.  Reduced need for methodology and skills training for in-house staff

22.  Overall product knowledge not just components

23.  Certifications and educational improvements

24.  Industry expert status--publications

25.  Crisis management

26.  Internal customer satisfaction

27.  Cross functional team leadership

28.  Customer service performance

29.  International skills

30.  IT and technical skills and use of advances

31.  Elimination of bureaucratic work

32.  Demonstrated leadership

33.  Voice of the Customer understanding

34.  Inclusion and collaboration with colleagues and other departments

35.  Innovation

Finally, I would recommend changing the focus areas for each purchasing or supply chain professional yearly to improve the breath of skills and capabilities.

Contact Dr. Tom = thomasdepaoli@yahoo.com 

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