Procurement is becoming the main strategy chamber of organizations. This sector bears the lion’s share of responsibility when navigating cost savings, cost avoidance, compliance, and even keeping the manufacturing line going. With such an important role to play—and so many vital facets depending on them—procurement must find and utilize the best and most effective methods and modes to accomplish these aims. Among the most relied-upon and prized “weapons” in procurement’s arsenal? KPIs. Do you know how to set procurement KPIs in 2022?
For those less familiar with the term, KPIs is an acronym for key performance indicators. KPIs are vital because they are measurable metrics that enable companies and operations to see and assess certain aspects of their performance. Basically, KPIs are the stats and data that help leadership (and procurement) answer the question: How are we doing?
For instance, KPIs can monitor progress in clear, specific terms. They often prove invaluable for helping to track any specific fiscal or profit goals regularly. The British mathematician Lord Kelvin said it best when he stated, “If you cannot measure it, you cannot improve it.” And what is procurement all about if not making constant improvements to process, product, and all overall operations in general?
Specifically, process improvements—or at least truly impactful and noteworthy ones—are only really possible when based on (led by) data-driven process improvement decisions. And you can only gauge whether things are improving after implementing said decisions by further measuring the outcomes. Again, enter KPIs.
What exactly can KPIs help procurement and purchasing departments do? The biggest thing would be how they enable procurement to monitor and manage, improve, and ultimately optimize everything from purchase expenses and sourcing of goods/services to quality, cost, and even time.
Further benefits of procurement KPIs include their aiding in evaluating and monitoring an organization’s procurement management efficiency overall, including ensuring that procurement’s process outcomes are aligned with the organization’s overall goals and strategy.
So, now that we know what KPIs are—and why they are so vital to procurement in particular— the next logical questions are: How do we set KPIs, and which ones are the most important?
To set the most ideal and effective procurement KPIs for your unique endeavor, you must take a close look at the strategy of your business. When doing this, helpful questions to ask yourself that will aid you in pinpointing your specific needs include, but are not limited to:
Answering these questions helps you hone in on what you need to be measuring, allowing you to then introduce the metrics (KPIs) you need to set in place to do just that. That being said, there are numerous KPIs to choose among, so let’s explore some of the top ones that procurement often relies upon today.
Listed below are five of the top procurement KPIs and metrics for performance monitoring:
This KPI helps procurement track the volume of suppliers the company does business with. This is important because relying on only a small number of select vendors rather than diversifying sourcing can be risky. Think of the consequences of having a dependency on one or two vendors that could leave you in a lurch with last-minute cancellations, or worse, if you have no other options lined up.
However, on the opposite end of the spectrum, having too many suppliers is not ideal—or profitable—either, as it is limiting your possibility of receiving discounts since some suppliers may be classified as contracted and unlisted vendors. This affects whether or not they comply with specific terms and conditions, which can affect quality, reliability, discounts, and more.
Avoiding unnecessary costs has an undeniable universal appeal and sounds good to everyone, yet far too often in procurement, costs that are avoidable can creep by unnoticed. With this metric, strategic expenses (think new investments or modern technologies) that generally have no real basis for comparison can be streamlined.
In most cases, you can use this metric to develop a set strategy to map cost avoidance internally. Couple that with cost reduction metrics to avoid any unnecessary costs moving forward. An excellent example of a smart cost avoidance strategy would be opting for long-term contracts that lock in prices/costs, designed specifically to protect your company from possible price fluctuations in the future.
The window of time from when a purchase requisition is submitted to when it is transferred to a supplier or contractor is referred to as the purchase order cycle time. This KPI covers, measures, and tracks everything from order creation to approval, including delivery, invoice generation, and payment.
PO cycle times vary, with some being mere hours to others being days or more. Procurement can use this knowledge of how long each supplier’s average PO cycle time is when choosing the smartest strategy while dividing suppliers into categories. For instance, those suppliers that respond to urgent orders and have been classified as having a short PO cycle time can be identified then given priority. This improves the overall cost and productivity of the procurement function and staff productivity due to the reduction in the PO cycle time.
On their ever-growing list of to-dos and action items, management needs to regularly assess and carefully analyze spend. They also need to make sure suppliers are regularly and carefully evaluated and that existing (and pending) contracts are reviewed to identify any possible red flags and possible savings opportunities. For instance, this would be where consolidating purchases or negotiating for high-volume discounts can mean significant savings. During such evaluations, a company can ensure that no one is going rogue, as maverick spending (also called rogue spending) can also be identified during these reviews of spend.
This KPI is king when measuring how cost-effective and profitable overall your procurement investment is. It is your secret weapon for conducting a comprehensive, internal analysis of how procurement is doing. At its basic level, procurement ROI can be summed up as annual cost savings/annual procurement cost.
However, this KPI alone won’t provide a complete picture of how procurement is faring. Instead, it needs to be paired with other KPIs (including those mentioned above) to offer a comprehensive understanding of where things are at with your overall operations and functioning.
In conclusion, KPIs are not a one-size-fits-all solution, but they come in handy since every organization should be keeping a close eye on cost savings and determining whether or not you are effectively avoiding inflation and shortages. Our homework for you today: Consider your organization’s top 3 strategic priorities, drill down from there, then let us know how you did. And, as always, we’re here to help.
By Michael Cadieux