Last week’s post on CPO views of supply management metrics ignited a heated debate among Supply Excellence readers. The post cited comments from the CPOs of National City Corporation and AllianceBerstein stating that cost reduction was the chief metric for supply management performance.

Since then, I have been flamed by angry readers defending the finer points of cost avoidance and performance measures. Some of these arguments were well founded. (You can read all the comments here.) But all Supply Excellence reader comments served the original intent of this post: to spark debate on what supply management’s value metric currently is and, more importantly, what it needs to become.

Before we get into the future of supply management metrics, I thought it important to clarify the comments in question made by CPOs during the Supply Management 2.0 Forum in New York earlier this month:

• National City Corp. CPO Jean-Jacques Beasussart said “cost reduction is the only thing that matters” to his company’s CFO. As stated in the original post, Beaussart’s supply management team does measure other performance attributes, such as supplier risk, but it is the cost reduction metric that helps him get the attention and support of the CFO. “The CFO of the business has to be your best friend,” said Beaussart. “But you have to speak his language and provide him with tangible results.”
• National City calculates hard-dollar savings contributed by procurement as follows: Cost Delta (between previous costs and newly negotiated costs) X Actual Purchase Volume = Savings.
• National City’s supply management team’s reported savings are validated by the Finance group. Once approved, Finance removes these supply cost savings from the businesses’ budgets. In other words, Finance takes an active role in ensuring that savings negotiated and driven by the supply management group become actual savings within the business P&L.

That should set aside any misgivings on the cost savings issue and whether cost savings is the only metric supply management groups should follow.

It isn’t. And that’s exactly the debate I had hoped this post would ignite.

If cost savings is the only measure that defines supply management’s value to the organization, then our function will never be considered strategic. In fact, supply management organizations that myopically focus on costs are sentencing themselves to business purgatory, with their importance and support within the organization rising and falling with the economic cycles.

As I’ve stated before, the only way to prove and sustain supply management’s strategic role is to quantify the function’s contribution to your company’s core objectives, such as developing innovative new products, increasing profits, penetrating new markets, and enhancing the corporate brand. Measures for the new era (Supply Management 2.0) should focus on supply management organization’s contribution to:

• increased profits, sales, and earnings per share
• faster time-to-market cycles
• introduction of competitively differentiated supplier innovations 
• increased customer satisfaction and renewals
• corporate sustainability and risk management 
• strategic positioning of the brand with existing clients and the broader marketplace.

I’m happy to say that companies like Sun Microsystems, Qualcomm, Starbucks, Hewlett-Packard, and others have made this shift. I’m even happier to report that Supply Excellence readers also recognize the importance of changing the metrics for supply management success.

Wrote one Supply Excellence reader: “Accounting measures for supply chain performance have an almost exclusive focus on cost savings or cost avoidance. Savings and avoidances are certainly worthy, insofar as they improve the bottom line. Savings alone, however, do nothing to help us build the business while the right supply chain strategic measures can and often do so.”

The most successful supply management groups will be those that use the current macro-economic factors (e.g., globalization, outsourcing, energy crisis, inflation, tightening supply markets) to secure the resources and support not only to drive near-term cost savings goals (i.e., what the CFO cares about today), but also to establish the internal alliances and organizational, process, and systems infrastructures to prove how you can contribute long term and sustainable value to your company’s corporate agenda.