Improving Procurment by Measuring KPIs
As the global entrepreneurial landscape becomes more volatile, stability and agility will increasingly become the keys to long-term organizational growth. Whereas companies have often turned to sales and marketing departments to spearhead growth, procurement teams will now play a just as big, or even more significant, role.
As a procurement professional, are you fully aware of the role you play in your organization’s success? Contracting suppliers and managing the purchase of supplies, materials, and equipment may headline your job description, but how you do it matters.
This is why, especially after the effects of COVID-19, your procurement strategy must focus on efficiency and sustainability. Improving procurement performance involves reevaluating your procurement process and assessing supplier performance. In the process, you’ll find significant cost savings and increase profitability.
To achieve the desired results, it is essential to determine the right key performance indicators (KPIs) to monitor. From such metrics, you’ll be able to create a baseline upon which you can measure your progress. Different procurement KPIs help with varying aspects of supply chain management, such as ensuring quality and improving delivery and spend management.
Streamlining the procurement process can be challenging, so this article will guide you through it and highlight:
- What to track to ensure efficient deliveries
- What to monitor to meet quality standards
- The metrics to look for to reduce costs
- How e-procurement tools can help you track procurement KPIs
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Category #1 of Procurement KPIs: Delivery KPIs
A key function of the purchasing department is to ensure that all supply deliveries happen on time. Any delays can slow down the production process, which then limits your organization’s capacity to fulfill orders on time. Some of the delivery-focused procurement KPIs to be keen on include:
1. Rate of Emergency Purchases
From time to time, you may be required to make an unplanned order to address a shortage of supplies or a sudden surge in demand. While they are necessary for some situations, it is crucial to reduce emergency purchases. The benefits of doing so include cost reduction, better risk management with supplies, continuity, and an improved procurement strategy.
To get the rate of emergency purchases, use the ratio of emergency purchases to total purchases over a specified period of time.
2. Procurement Cycle Time
The amount of time it takes your company to send purchase requisitions to vendors after they’ve been submitted greatly affects your company’s effectiveness and agility. This duration, measured in hours or days, is referred to as the purchase order cycle time. If you want to match up with the best-performing procurement organizations, then aim to bring that time down to five hours.
3. Supplier Lead Time
Reducing the purchase order cycle time reduces the amount of time it takes from when a purchase requisition is submitted to when goods are delivered. The next step in achieving this is assessing and reducing supplier lead time. This KPI measures the number of days from when you submit an order to a supplier to when they deliver it.
Supplier lead time = Delivery time (Goods and receipts delivery) – Order time (PO acceptance)
4. Vendor Availability
As a procurement professional, you know all too well how stressful emergency orders can be. Since they are somewhat inevitable, preparation is key. You must determine how reliable your vendors are when such situations arise. Otherwise, you may find yourself sourcing for supplies elsewhere anytime there’s an emergency order. This KPI is referred to as vendor availability.
It is the ratio of the number of goods a vendor has compared to the order quantity placed with them.
If you want to match up with the best-performing procurement organizations, then aim to bring your procurement cycle time down to five hours.
Category #2 of Procurement KPIs: Quality KPIs
Part of the procurement department’s job is to ensure that all supplies meet the desired quality standards and contractual requirements. Quality-focused procurement KPIs to monitor include:
1. Compliance Rate
All relationships with suppliers should be fortified with contracts stipulating both parties’ obligations. Even if you are able to negotiate the best pricing with suppliers, it is of no benefit if their contractual compliance rate is low. This can translate to delivery delays, additional costs on your part, and failure to meet client expectations. To ensure compliance rates remain close to 100%, include clearly defined penalties in the contract.
Some of the things to take note of in relation to compliance rates are:
- The number of disputed invoices in comparison to total invoices
- The difference between the total cost of purchasing and the quoted price
2. PO Accuracy
Other than timely delivery, it is integral that your suppliers deliver exactly what you ordered. This is referred to as purchase order accuracy. If it’s low, then your operating costs may increase. Some of the things to track with this KPI include:
- Percentage of goods or services delivered outside the pre-defined service target
- Percentage of deliveries with errors to the total number of purchase order over a given time period
3. Supplier Defect Rate
With each supplier, there is the expectation that they will deliver high-quality goods. However, from time to time, there may be a few defects. To determine whether they’re reliable in terms of quality, your procurement department should measure the supplier defect rate. They can measure this rate as the number of defective products per one million.
It is also good to go beyond the supplier defect rate and also assess the type of defects. This will give you additional insight that will help determine a vendor’s reliability. Defect rate is often calculated in parts per million, and the formula is as follows:
Defect rate = (Number of defective products / total products in shipment) × 1,000,000
Category #3 of Procurement KPIs: Cost-Savings KPIs
A crucial element for scaling and making an organization more profitable is cost management. By being in charge of purchases, the procurement department plays a major role in this. To keep costs low, monitor the following key performance indicators:
1. Spend Under Management
The management team offers direction for the company and is tasked with charting the way forward. When management has greater control of procurement (spend under management), it will be easier to optimize cost forecast expenses.
SUM= Total approved spend (direct, indirect, and service-related costs) – Maverick spend
2. Cost per Invoice and Purchase Order
The cost spent per invoice and purchase order varies from one organization to the next, depending on various factors. For organizations that rely on manual processes, the costs will rise even higher. This is why process automation is essential.
3. Procurement ROI
Your procurement team’s efficiency and success will be measured by the return on investment on the procurement process. This KPI is measured as follows:
Procurement ROI = Annual cost savings / Annual procurement cost
4. Price Competitiveness
Getting and settling on specific vendors is great because it allows for consistency. However, it is also important for there to be multiple suitable vendors. This ensures that suppliers will not become lax, resulting in reduced quality or unwarranted price increases. Have a list of alternative vendors and the unique advantages they offer.
To determine price competitiveness, compare the prices you pay with those listed on procurement market sites.
5. Cost Avoidance
Cost avoidance, referring to measures taken to reduce future costs, is one of the best cost management techniques. You can achieve this by entering into long-term contracts with suppliers. Such a step should be taken when you have negotiated competitive prices.
6. Maverick Spend
In some cases, members of your purchasing department can go rogue and make orders without following the proper channels for approval. This is referred to as maverick spend and occurs more often than most organizations would like to admit. It is crucial to eliminate or at least drastically reduce maverick spend to optimize procurement efforts.
7. Total Spend by Vendor
Large organizations often deal with many vendors. This increases the likelihood of not getting the best deals from each one. Calculate the total spend on each vendor and compare it with the goods or services delivered. The good thing about this KPI is that it also gives you insight into the number of suppliers you have, allowing you to consolidate them. This then puts your procurement team in a better position to negotiate better terms.
How to Easily Monitor Your Procurement KPIs
Undoubtedly, monitoring these procurement KPIs can have a transformative effect on the success of your company. While it is possible to do so manually, it is not efficient. Using tools that automate this process will give you faster and more accurate results, allowing you to take the right steps early. It will also save your staff the time they spend collecting and analyzing data.
Some of the benefits such tools offer include:
- Increased productivity
- Reduced process time
- Improved compliance
- Substantial cost savings
- Increased speed and efficiency
- Easier monitoring of the entire process
When it comes to monitoring your procurement KPIs, you need the right tool to support your efforts. Along with offering exceptional visibility, Negotiatus offers customizable approvals and budgeting. It is also easy to use. Request a demo today to find out how Negotiatus can help streamline your procurement process.