February 21st, 2019 • Procurement Process
Businesses today want procurement teams to drive value beyond cost savings. As a result, procurement leaders are constantly looking for ways to improve their procurement process and make it more sustainable. However, they don’t want to make any decisions without the right data. And so, they track an array of metrics as KPIs.
While procurement key performance indicators (KPIs) is a widely used buzzword in procurement circles, they are not set on stone. Procurement KPIs mean different things to different businesses, almost to the point that most procurement leaders aren’t sure what counts as a KPI and what doesn’t.
But when it comes to decision making and performance tracking, how can you be sure that the KPIs that are being tracked matter the most? Only by gaining a better understanding of the metrics and taking a look at the procurement KPIs that are used by industry leaders.
Here’s a breakdown of 11 procurement key performance indicators that should never be ignored.
Procurement KPIs are a type of performance measurement tools that are used to evaluate and monitor the efficiency of an organization’s procurement management. These KPIs help an organization optimize and regulate spending, quality, time, and cost.
Additionally, procurement KPIs help businesses to keep pace with their overall process goals, procurement strategies, and business objectives.
The saying “If you cannot measure it, you cannot improve it” holds as true as ever. Measuring the efficiency of a procurement process is important, as it plays a critical role in the supply chain in the case of an economic downturn.
While cost savings are an obvious objective of procurement performance, it is not just restricted to that. By measuring the performance of a procurement process, organizations can find answers to other important questions like:
The right procurement KPI is relevant to your business goals and simple to track. While you’re drafting your first procurement KPIs, it can be a bit overwhelming. By gaining a better understanding of their purpose, you would be able to identify KPIs that better serves to your needs.
Listed below are eleven procurement KPIs that every organization should keep track of:
Depending on their purpose, these procurement KPIs can be split into three major categories: ensure quality, improve delivery, and delivery savings. All three categories are interdependent, so focusing on just one category might harm the other two and decrease the process sustainability.
Contractual and policy compliance are pivotal to ensure legal security. If these compliance rates dip down, they can spike up indirect and maverick spend. A foolproof purchasing contract with clearly defined penalties can improve the compliance rate
Metrics to note:
Supplier defect rate is used to evaluate a supplier’s individual quality. Measuring supplier defect rates and breaking it down based on the defect type will offer actionable insights about a supplier’s trustworthiness. Supplier defect rates are usually measured in defects per million.
Supplier defect rate= Number of substandard products/Total number of units tested
Low PO accuracy hikes up operating costs. Procurement KPIs are measured across supply categories, buyer segments, and more. This metric will help businesses ensure whether suppliers are delivering what was ordered and if it was delivered at the right time.
Indicators to track:
Emergency purchases are those unplanned orders which are acquired to prevent the shortage of products/services. This metric is measured with the ratio of emergency purchases to the total number of purchases over a fixed period of time.
By lowering the rate of emergency orders, organizations can:
Supplier lead time is the amount of time that elapses between the time a supplier receives an order and the time when the order is shipped. This KPI is often measured in days. Vendor lead time starts with availability confirmation and ordering and ends with the delivery of goods.
Supplier lead time = Delivery time (Goods and receipts delivery) – Order time (PO acceptance)
Purchase order cycle time is measured in hours or days from the time a purchase requisition is submitted to the time when it is transmitted to a vendor or contractor. This KPI covers the end-to-end ordering process which makes up the whole purchase order cycle.
Vendor availability is used to measure a vendor’s capacity to respond to emergency demands. This procurement KPI helps organizations determine the degree of reliability they can place on a vendor.
Vendor availability (%) is measured by the ratio of the number of time items available on a vendor’s side to the number of orders placed with the supplier.
Cost spent per invoice and purchase order can vary from one organization to another depending on the factors that are included in this calculation. An organization that follows a manual approach will have higher processing costs when compared to other organizations that use an automated process.
A recent APQC survey shows that organizations with little to no automation in place end up spending at least $10 or more per invoice.
Spend under management is the percentage of procurement spend that is regulated or controlled by the management. As an organization’s spend under management rises up, its ability to optimize cost and forecast expense increases with it.
SUM = Total approved spend (i.e., direct, indirect, and service-related cost ) – Maverick spend
Procurement ROI is used to determine the profitability and cost-effectiveness of the procurement investment. This metric is best suited for internal analysis.
Procurement ROI = Annual cost savings / Annual procurement cost
Little to no competition among vendors can lead to a place where a few suppliers enjoy a monopoly. This can lower quality over the long run. Here the emphasis is placed on shortlisting vendors that offer the buyer a distinct competitive advantage.
Price competitiveness can be measured by comparing the price paid with the published market prices listed on procurement market intelligent sites like Beroe Inc.
To step up procurement performance, organizations need to automate KPI measurements and tracking. Automation will not only help organizations in data collection and segregation allowing procurement staff to spend more time on analyzing the collected data.
Adding automation to the mix will offer a number of great benefits like:
With KiSSFLOW, organizations can tailor unique processes that measure procurement KPIs effortlessly.
It offers a number of process templates that can be tweaked to fit around an organization’s business needs. 360-degree visibility offered by KiSSFLOW ensures consistency and transparency across the whole process cycle, vendor evaluation, and performance ratings.
Tracking procurement KPIs has never been easy with KISSFLOW’s automated process apps that collect, store, and analyze necessary information with minimal human effort. Collected data is then shared with all relevant parties with role-based access to ensure data security.
Moreover, KiSSFLOW provides automated reminders to procurement leaders and vendors alike to keep the process on track.
It also gives procurement leaders the ability to create custom reports that show key metrics like PO cycle time, the rate of emergency purchases, and the annual procurement savings to annual procurement costs.
The process of developing procurement KPIs at an organization isn’t always a clear-cut task. But, when procurement leaders take the time to identify their business needs and understand the nature of procurement key performance indicators, it is easy to pick those which are in tune with an organization’s goals.
Automation can help businesses measure KPIs, gain actionable insights, mitigate risks, and increase profitability. Looking for ways to improve the efficiency of your procurement process without making a dent on your IT investments? Take a look at KiSSFLOW today and see how effortless it is to track procurement metrics that matter.
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