8 KPIs to Evaluate Procurement Performance
Whether you’re trying to grow muscles or a business, it’s very difficult to understand the impact of a new methodology without measuring the progress. This is the case with procurement management as well. When you automate your procurement processes, you also need to identify appropriate KPIs (key performance indicators) to monitor over time in order to understand if automation is having the desired effect.
However, random measurement does more harm than good. You need to be careful not to fall prey to vanity metrics that don’t add any valuable insights to process performance.
Here are a few KPIs that your business must monitor if you’re seeking to improve procurement processes.
Procurement cycle time
The time taken between raising a purchase request and receiving the goods is called the procurement cycle time. Shorter procurement cycle times indicate greater efficiency and higher cost savings.
According to a survey conducted by Paystream Advisors in 2018, reduced cycle times were the greatest benefit (56%) experienced by respondents from automating procurement processes. If your process time is not shortened after automation, it may be an indicator of inefficiency in the workflow.
Managing vendor performance is critical to procurement efficiency. The performance and quality of vendors must be monitored and analyzed to ensure higher profits, reduced inventory costs, and greater stakeholder satisfaction.
Metrics that provide insight into vendor performance include delivery lead times, communication time lag, product quality, competitive pricing, compliance with terms and conditions, number of substitutions, and number of backorders. Procurement management software can provide in-depth analytics that will enable more efficient vendor management.
Spend under management
This refers to the percentage of your organization’s total spend managed by the procurement department. It is essentially a comparison of procurement expenditure versus overall organizational expenditure in any given period. The higher the spend under management score, the more likely it is that the department can make its own purchase decisions. When your procurement team has its costs under control, the likelihood of decisions being better informed is more. It also means greater savings for the business overall.
This is a fundamental and commonly used metric to measure improvements in procurement processes. Cost per purchase order can be reduced through methods such as automation, vendor self-service, adopting mobility, or guided buying catalogs.
Rate of compliance
Contractual compliance can be analyzed by calculating the ratio of disputed versus total invoices as well as the total difference between the price paid versus the price quoted.
Many organizations compile a list of approved vendors as well as guided buying catalogs. In such cases, the organization benefits through agreements with the vendors, competitive pricing, better service, and fewer errors. The percentage of catalog-based POs can then serve as an apt substitute for compliance rate.
Metrics such as the number of defects per thousand help procurement teams ascertain the quality of products being delivered by suppliers. The higher the number of defects, the longer it takes for procurement cycles to be completed after factoring in returns.
The supplier defect rate is calculated by dividing the number of substandard products by the total number of products delivered.
Return on investment is one metric guaranteed to be on the mind of every CxO. Procurement isn’t typically considered a direct revenue-creating function. So calculating procurement ROI involves comparing department costs to its savings.
Rate of emergency purchases
Sometimes businesses need to make unplanned purchases to prevent running out of stock. These are called emergency purchases. Their frequency can be measured by comparing the number of emergency purchases to the total number of purchases in any given timeframe.
It’s ideal to keep the rate of emergency purchases as low as possible in order to enjoy benefits such as cost savings, improved procurement plans, reduced risks, and process continuity.
When the effectiveness of procurement management techniques isn’t measured, your team can never be sure of which approach works best. It’s like volunteering to drive while you’re blindfolded. For greater clarity and certainty about which way you’re taking your business, monitoring process performance is imperative.
The easiest way to do this is to use competent procurement management software that combines automation, powerful analytics, and fuss-free collaboration in a single platform. A careful choice can reap benefits for your procurement team for years to come.