Page 107 - New Employee Onboarding

Section I: Cost Management Methodology Explanation

Modified Producer Price Index Methodology (“MPPI”):

Rationale

It is widely accepted that reviewing supply chain cost management performance is critical
as it evaluates the function’s value delivery to its customers, in this case Co-op Members.
Adequate and appropriate measures ensure that a supply chain organization is motivated
and its activities are aligned with organizational strategy.

In previous years, the Co-ops implemented the Cost Impact Reporting (or CIR) framework to
measure cost management performance. Under the CIR methodology, category managers
turned in cost impact reports to document economic results of their procurement efforts .
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Three types of cost impacts were documented and reported to the Boards, including: cost
savings, costs increases, and cost mitigations (i.e. efforts to mitigate negative cost impacts
due to legal obligations or other issues).

Some of the main advantages of the CIR methodology are as follows:
 It is a very thorough and meticulous approach as it captures all cost impacts during
a year, whether positive or negative.
 Category managers were assigned specific savings goals that were reliably
measurable.
 In many cases, the CIR approach captured not only the procurement team’s cost
impact contributions but also its risk management, product quality management, and
inventory management capabilities.

However, the CIR methodology had several setbacks such as burdensome paperwork
requirements, time consuming approval & audit processes, and its inability to gauge
performance against industry benchmarks. The primary disadvantage of the CIR approach
was the disconnect between reported performance and the cost pressure realities of Co-op
Members. While the methodology could accurately result in multi-million-dollar savings
being reported, it failed to take into account the non-controllable increases in commodity
markets that resulted in higher costs for Members.

For the above reasons, it became clear that a different approach towards measuring
procurement performance was necessary, one that could reduce administrative burdens,
improve industry comparability, and create meaningful metrics that could help Membership
better understand the value of the Co-Op. Recently, it has been a supply chain management
best practice to compare procurement performance against an external index. The
2
International Institute of Supply Management has popularized this framework . This
framework’s main advantage is to provide a perspective into how an internal procurement
team performs in comparison with the industry. In the Co-ops’ case, the approach also helps

1 See further details in CSCS’s Cost Impact Reporting Guidance published in 2012.
2 https://www.instituteforsupplymanagement.org/files/pubs/proceedings/bdbendorf.pdf

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