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Not sure how to choose and set the right KPIs for your procurement organization? Here we are with some guidance as well as 20 most important procurement KPI examples that you can use in your company.
Businesses today expect procurement to drive more value than just cost savings. As a result, procurement leaders constantly seek ways to enhance their procurement processes and make them more sustainable. The long-term success of which depends on grasping the bigger picture and using data or KPIs rather than relying on assumptions.
What are Procurement KPIs?
KPIs or Key Performance Indicators like a compass show you whether the path you're taking towards your strategic goal is right or not. In short, it's like a performance management tool to help you determine the performance of and strategize your procurement goals.
The problem is, there are thousands of KPIs to choose from, and picking the wrong ones means measuring things that aren't relevant to your goals.
It isn't uncommon for companies to stray off course because of measuring the wrong things. But it's better if you discover those mistakes right away and get back on track by revisiting your key performance indicators (KPIs).
So how do you pick the right KPIs for your procurement organization?
In this article, we provide a brief overview of how to select the right KPIs for your company. We will also showcase 20 meaningful procurement key performance indicators that businesses of any size can use.
How to Choose the Right Procurement KPIs?
There is an old saying in procurement: "What gets measured gets done." However, knowing what and how to measure underpins the success of your performance management framework.
The First Step
Choose one or two measures that directly contribute to each of your procurement objectives.
Despite many moving parts that are integral to procurement operation and performance, it's neither possible nor efficient to track everything that goes on internally. For one thing, not all measures are important enough to track. For another, too many KPIs create unnecessary work and confusion.
The trick is to choose one or two KPIs for each of your objectives that will be most helpful in achieving them.
The Second Step
Check that the selected measures meet the requirements of a good KPI.
Make your KPIs tick through these pertinent questions:
- Will it be possible to measure the selected KPI handily?
- Is't easy to accurately measure the KPI in a timely manner?
- Does this KPI connect to the overall company objective and strategy?
- Can the KPI be utilized to impact or drive change without getting out of hand?
- Does the KPI cover the wide array of procurement perspectives?
- Will the KPI pass the test of time?
If the selected KPI answers many of these questions "no," it may signify the KPI you have chosen needs to change.
The Third Step
Assign KPI responsibilities to concerned teams and individuals.
KPIs are a valuable tool for measuring progress, but they are most likely to deliver results if someone is responsible for tracking and reporting them.
Added to that's the responsible person or team is often more inclined to make the measure succeed rather than accepting underperformance. This way, allocating responsibility enhances the chances of delivering success.
The Fourth Step
Track and report the KPIs.
Lastly, it's essential to keep an eye on your KPIs on a monthly, quarterly, or other predefined reporting frequency.
Regular monitoring makes it easy to identify when something may have underperformed or overperformed and what may have occurred within this period to cause the change.
Also, it's crucial to ensure that everyone in the organization is on the same page. Since many measures and goals are interconnected, share these findings with all relevant parties.
20 Procurement Key Performance Indicator Examples & Definitions
KPIs Related to Cost and Savings
These KPIs are used to keep costs low and make you spend smarter.
- Cost development: Measures the changes in cost over time and the effect of savings.
- Savings: Identify a percentage of actual savings year over year. Be sure to consider reasons for unavoidable cost increases to get the true savings figures like inflation, energy, etc.
- Cost reduction: Cost Reduction = Actual Purchasing Price – Last Price Paid. The quest for cost reduction makes negotiating better prices for products and services, process optimization, and automation a regular practice for procurement.
- Cost avoidance: This metric helps avoid extraneous future costs and is often referred to as "soft saving" KPI as opposed to the "hard saving" cost reduction KPI. Some examples of cost avoidance are: signing long-term contracts to avoid future price fluctuations, investing in new technologies to cut spending into compensation costs.
- Purchase price variance: Purchase Price Variance (PPV) = (Actual Price – Standard Price) x Actual Quantity of units purchased. PPV calculates how effectively a procurement organization meets its cost-savings goals. A positive variance in PPV means the price paid to buy an item is higher than the budgeted range. Hence, a positive PPV is considered bad. At the same time, a negative variance of PPV is favorable and desirable.
2. KPIs Related to Spend
- Spend under management (%): Dollar Amount of Expenses Managed by Procurement / Total Company-Wide Expense) * 100. Spend under management or SUM refers to the portion of a company's expense that the procurement department overviews. As the company's spend under management increases, the potential for cost-optimization and forecasting also increases. A low value of this indicator means the company has high maverick or rogue spendings and ill-defined procurement processes. Additionally, a low SUM implies the company is missing out on the considerable cost-saving or reduction opportunities that regular spend analysis, supplier evaluation, and contract management can bring.
- Maverick spend: Maverick or rogue spend means spending outside the defined purchasing policies. Maverick spend % compares supplier invoices without a purchase order reference to all supplier invoices. A lack of understanding of processes, a lack of a centralized purchasing system, and heavy indirect spending are the top reasons for maverick spending. As a result, the organizations that fail to address maverick spending see their compliance and benefits diminish.
- Contribution to total spend: Procurement teams can benefit from this procurement KPI in many ways. For instance, it can track an item's contribution to the total spend, a category, or a supplier. When you have too many suppliers, using this KPI, you can consolidate the suppliers you want to work with and find goods and services at a lower cost.
3. KPIs Related to Contracts
- Contract prices and compliance: Contract compliance is crucial to the success of any procurement organization. This KPI helps you maintain a set contract pricing across buyers and suppliers. As a result, you receive agreed-upon prices from your suppliers, and people within your organization buy on contract.
- Contract Loyalty (%): Spend bought through a contract / total spend
- Contract coverage ($): Spend where a contract exists / total purchase
4. KPIs Related to Suppliers
- Number of suppliers and supplier spend: This KPI helps you track the suppliers you are spending, intending to limit 80% of the spend through 20% of your suppliers. As a variation of this KPI, you can also measure what percentage of your spending goes with sustainable suppliers.
- Quality performance rating: It is advisable to use one or more KPIs to evaluate supplier performance on price, delivery, quality, and service. Companies should also measure the percentage of assessed/audited suppliers to give the supplier performance analysis more depth.
- Procured suppliers (%): Spend from suppliers who have been through the procurement process / Total spend.
5. KPIs related to Competition
Total Procurement ROI: This KPI measures the reduction in costs - including avoided expenses - achieved through procurement measures compared to the total operating costs of the procurement department. In short, this KPI gives a ratio of the amount spent over revenue earned. Benchmarking this KPI makes sure your company is competitively and financially strong enough to pursue its goals.
6. KPIs Related to Processes
The procurement process KPI tracks the following processes:
- Number of procurement processes completed per negotiator per year.
- Time spent from sending the RFQ to signing the contract.
- Time spent per procurement process.
- Time spent per process step in the procurement process.
7. KPI Related to Customer Satisfaction
This KPI considers the survey result of how satisfied a company's suppliers, purchasers, employers, and partners are.
How to Determine Which Procurement KPIs To Use?
There are a lot of KPIs to choose from, but you would want to narrow down your list to only those KPIs that will truly help drive your strategy forward. What's right for you might not be right for the other organizations. Hence, we suggest you research as many key performance indicators as possible to decide what works best for you. Once you are through that step, you have to integrate the selected KPIs throughout your organization and match them up to your company's overall strategy.