We all want success. For procurement professionals and managers looking for ways to track success and gauge their company’s performance, procurement metrics are indispensable.
However, procurement leaders today have been tasked with metrics that seem unattainable. How can we keep providing cost savings in a recessionary environment? We’ve seen more discussions on LinkedIn and in the Foundry than ever before about struggling with metrics and unattainable metrics.
The good news is, there are other metrics to track. Cost savings is not the only important factor in procurement today.
Think of metrics as a measuring stick of sorts. Essentially, they help you know if you are growing—and how much and where. We need to have them, and we need to track the most important ones — no matter how good or bad the news is.
Anyone in procurement will be familiar with the term KPI, an acronym that stands for Key Performance Indicators. A key performance indicator, or metric, is a measurable value that tracks everything related to the procurement of goods. This is valuable data that allows procurement departments to control and optimize things like the quantity, quality, costs, timing, and sourcing of purchasing processes to achieve optimum results.
According to cflow, KPIs
KPIs are powerful—and crucial—for companies, especially procurement. After all, it’s like the British mathematician Lord Kelvin said, “If you cannot measure it, you cannot improve it.”
Remember, success is defined by way more than cost savings. And the procurement function that isn’t futureproofing their supply chain to withstand disruptions will be the one with poor KPIs. If you’re trying to avoid bad conversations with the C-Suite diversifying your KPIs and scorecards is key.
Compliance rate helps you understand if your suppliers are fulfilling your requirements. It’s important to know that your vendors are adhering to their contracts and your company’s policies. This compliance is crucial, especially when it comes to your legal security.
But it also affects your spend. If a vendor’s compliance rates fall, the opposite effect can be said of your indirect and maverick spend—which could rise. To avoid this and improve the compliance rate, it’s essential to have a failsafe purchasing contract with defined penalties.
This KPI helps you track your level of dependency on your suppliers. If you only have a few, your dependence on the reliability, quality, etc., of each is high. This was not always necessarily bad, but if the COVID era taught us anything, it’s that things can happen, and we need to be prepared with the ability to pivot, not solely depending on one or two vendors.
This KPI is one of the best when it comes to tracking efficiency. Starting from the second an order is placed for products or services, up until those goods or services are received, this KPI lets you know how you are doing. Of course, faster is almost always better, assuming quality isn’t neglected in the process.
Why? Because delays can be quite costly. Have you ever held up production because of a missing screw? Certain car manufacturers have, and it cost a fortune.
Monitoring order cycle time is particularly useful in helping you know who to address your urgent orders to. You’ll, of course, want to choose the vendors who are operating at the top of their games and have the lowest cycle time getting products or services from A to Z in fast—and working—order.
This KPI helps you analyze the quality of your suppliers, which covers a wealth of specific criteria. Mainly, however, it all comes down to cost versus quality and that this equation aligns with your ideals.
Essentially, you are looking for top procurement performance, the cornerstone of which involves using quality suppliers that will sell your business the best materials at the lowest rate.
This is a simple KPI that helps measure suppliers’ capacity to respond to demand. This KPI is beneficial to gauge which of your suppliers can respond to any emergency demands, helping you decide how much you can depend on that vendor (their degree of reliability, for instance).
Supplier defect rate helps you evaluate your suppliers’ individual quality. According to Procurify, “Procurement agents use matrices such as number of defects per thousand or million to measure the quality of purchases; the lower the rate, the greater the quality of the purchase.”
Why is this such a powerful and telling metric? Procurify explains that it’s because “shipments with high rates of defective merchandise not only limit the amount of quality merchandise in company inventory, but also prolong the procurement cycle from requisition to delivery if items constantly have to be returned.” Companies want to avoid this at all costs.
As mentioned before, keeping tabs on the quality of your shipments from your vendors is crucial. This includes the rejection rates—and the costs incurred by these—which is data that can help keep you dealing with only the best vendors and help you examine your quality management strategies as a whole.
Supplier lead time is the amount of time between when an order is shipped, and the time a supplier receives the order. This KPI is often measured in days and helps you understand the total time it takes to fulfill an order.
This KPI helps you track the number of emergency purchases you are making. Common sense here says: If it’s a lot, something has to give.
Monitoring purchasing time and budget is always essential, and this KPI should be considered a basic building block/measuring stick of any company, not to be ignored.
Simply put: This KPI helps to control the internal costs incurred by each invoice or purchase order. For instance, a company that adopts a manual approach to invoicing is likely to have costlier processing versus a business that has adopted an automated process for invoicing.
This one is also common sense: You want to reduce expenditures as much as possible without lessening quality or efficiency. This KPI helps you do just that—specifically, streamlining tangible cost savings. This is going to be a difficult one to achieve this year, so make sure to add some padding with more KPIs that measure the effectiveness of other processes.
Similar to current cost reduction, you want to avoid potential extra costs in the future. This KPI helps you succeed in doing so by using measurable data to look forward and—in a pretty cool way—essentially predict the future, so you can take measures that show you are betting on yourself.
Simple and concise, this KPI is a way to track and optimize your expenditures. It’s the percentage of procurement spend controlled by management.
The rule of thumb for this, according to Kissflow, is that “As an organization’s spend under management rises up, its ability to optimize cost and forecast expense increases with it.” And that is clearly something we want.
Finally, there is tracking procurement ROI (return on investment), which determines the profitability of your investments. After all, if what you are pouring energy—and money—into isn’t paying you back in the end, it’s time to reassess where you are allocating your resources.
For expert advice on how to set procurement KPIs, reach out to the community inside the Foundry to learn even more on a variety of topics. There are a lot of spicy conversations happening about KPIs and which high-performers are tracking what. Join us today to get started.