Top 16 Procurement KPIs – The Ultimate Guide

Nowadays, no one could deny that businesses today expect procurement teams to drive value beyond cost savings. As a consequence, procurement leaders are constantly?looking for?ways in order?to enhance?their procurement process and make it more sustainable. However, they don’t want?to form?any decisions without?the proper?data. And so, they track an array of metrics such as KPIs.

Procurement KPIs (Key Performance Indicators) mean various things to different businesses, almost to the purpose that the majority of procurement leaders aren’t sure what counts as a KPI and what doesn’t.

The procurement process is not any longer the straightforward source-buy-pay cycle ; it's grown into a full-fledged business function that plays a crucial part within the business’s growth strategy. The procurement manager has his task cut out – he must monitor, measure and manage the performance of his team.

Procurement KPIs and metrics are considered effective since it is helpful to measure the performance of the procurement team. Procurement KPIs are essential to measuring the performance of the procurement process.

In fact, procurement leaders usually look?to enhance?their procurement process bank on an array of procurement metrics that help them, monitor, evaluate, manage, and improve the procurement function.

What is Procurement KPIs?

“If you cannot measure it, you cannot improve it” – Lord Kelvin.

Procurement KPIs are?a sort?of performance measurement tool that can?evaluate and monitor the efficiency of an organization’s procurement management. These KPIs help?a corporation?optimize and regulate spending, quality, time, and cost.

Additionally, procurement KPIs help businesses keep step with their overall process goals, procurement strategies, and business objectives. Measuring the efficiency of a purchase process is necessary and vital as well since it plays a critical role within the supply chain in the case of an economic downturn.

As explained, Key Performance Indicators (KPI) are important metrics that measure specific aspects of performance. Thus, KPIs enable project teams to watch and share progress in a lucid and objective manner. Procurement KPIs are more granular and specific goals that are easy to trace on a monthly or day today.

Procurement KPI template in Excel

If you are looking for a Procurement KPI template in Excel , you can download this customizable template we have established for to SCMDOJO Community.

You can also refer to the blog Top 18 Supply Chain KPIs for the Supply Chain Team and Supply Chain KPI Dashboard – Customizable Template with Example to help your supply chain teammates.

What is Supplier Performance Measurement?

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According to Sherry R. Gordon, the author of “Supplier Evaluation and Performance Excellence”, Supplier Performance Management could be defined as:

“The process of evaluating, measuring, and monitoring supplier performance and suppliers’ business processes and practices for the purposes of reducing costs, mitigating risk, and driving continuous improvement.”

Managing supplier performance can help companies focus their resources on value-added activities, instead of addressing the problems caused by supplier performance (defects, rush, excessive inventory, delayed delivery to customers, shutdowns, reduced market competitiveness, etc.) reaction.

By improving performance visibility to better understand supplier performance, companies can better monitor and manage key relationships by taking measures to prevent or correct problems. And, on the positive side, they can identify and utilize suppliers with creativity and continuous improvement capabilities, and they will add value to the relationship.

The excellent performance of the supplier has brought the company a competitive advantage.

Within the scope of good supplier performance, the company can enjoy a competitive advantage, because this performance is reflected in lower costs, increased response speed to customers, high-quality goods and services, and technological advantages.

In order to move from the concept of managing supplier performance to managing business relationships for mutual benefit, it is not only necessary to have an in-depth understanding of supplier performance, which is usually defined as quantifiable performance indicators, but also methods and methods to achieve excellent performance through optimal business processes: Practice, and through facilitating behavior and culture.

Business relationship management needs to involve appropriate functions and use effective methods to communicate with suppliers.

For major suppliers, communication may include the exchange of information about company history, capabilities, financial and market performance, and future business plans. These communications will involve employees at multiple levels from senior management to both parties.

What are the Benefits of Performance Management using KPIs for Procurement?

• Focus on key results areas (critical success factors) such as cost reduction and quality improvement.
• Reduced conflict arising from causes such as goal confusion and unclear expectations.
• Clearly defined shared goals, facilitating cross-functional and cross-organizational teamwork and relationships.
• The ability directly to compare year on year performance, to identify improvement or deterioration trends.
• Increased and improved communication on performance issues.
• Motivation to achieve of better the specified performance level.
• Support for collaborative buyer-supplier relations, by enabling integrated or two-way performance measurement.?

What are the main Procurement KPI Categories?

Another way to define performance expectations is to identify the most important business drivers that affect your company and its customers. These business drivers are usually in the areas of cost, quality, time and technology/innovation. Breaking down each of these drivers into supplier impact and supplier risk can help you determine what to measure.

The business drivers described in this section link the supply chain management system to market success and overall company performance and are critical to obtaining and maintaining support for supplier management.

Cost

For more and more companies, the supply chain has become the largest single source of cost and the largest opportunity for cost reduction and profitability. The hidden cost driver lies in the supply chain and may undermine the profitability and competitiveness of customers and suppliers. Identifying and eliminating cost drivers is the main goal of supplier performance management. Although cost pressures have always been an important issue, they are more of a result or side effect of the business processes that drive these processes. The best way to solve the cost drivers is to improve the business processes that drive costs within the client's company and within the supply chain.

Time

Since approximately 40% to 50% of the cycle time can be attributed to the supply chain, market responsiveness is very dependent on the supplier’s performance. Two important areas where suppliers influence cycle time are the lead time of purchased materials and the product development cycle.

For the purchasing organization, the purchased material lead time may be the longest part of the cycle time. Therefore, time-based metrics (such as on-time delivery and supplier lead time) are common metrics. But equally important is how and whether suppliers continue to solve the problems of internal cycle time and on-time delivery to customers.

Another important aspect is responsiveness. The company's response speed to customer needs usually depends on the supplier's response level.

Quality

It should be known that variability in terms of supplier processes is able to impact the standard of products and services. In businesses with high supplier content or heavy dependence on supplier services, the supplier quality features a heavy impact. Responsiveness to corrective actions can?fall into?either quality or customer responsiveness.

When supplier failures occur within the field or at the customer, a company's responsiveness to its customers is gated by the capabilities of its suppliers. When this failure is traced back to a sub-tier supplier, the sub-tier supplier might be unaware who the particular customs of its end products are and of their warranty requirements. Thus, quality may be a cost driver.

You can refer to Brief Guide to Supplier Quality & Supplier Development for further reading on this topic.

Technology

For many companies getting new products to plug rapidly may be considered as a key competitive opportunity. Concerning the suppliers who usually support new development strategies, these need to be qualified and measured not just from a technology capability standpoint but also from an understanding of the robustness of their internal product or service development processes. Usually, firms choose development partners without employing a formal process and with no criteria beyond good technical capabilities. They neglect to seem at the whole picture: How the corporate develop products and services and whether their internal processes and practices are robust and sustainable.

Cost

1. Average Cost per Order

The cost of the order is one among the disputed procurement KPIs because the definition and application vary. In theory, this metric represents the typical costs of processing an order, from purchase creation to invoice closure. In practice, the prices to process internally the acquisition order can include a staggering list of variables and counting on studies.

?1. Percentage Change in Cost vs Previous Year

Percentage change is often applied to any quantity that you simply measure over time. For instance, you're tracking the quoted price of a security. If the worth increases, use the formula [(New Price - Old Price)/Old Price] then multiply that number by 100. If the worth decreased, use the formula [(Old Price - New Price)/Old Price] and multiply that number by 100.

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2. Cost Avoidance: Avoid potential extra costs in the future

The second last of our procurement metrics focuses on the actions undertaken?to scale back?potential future costs, like replacing parts before they fail, and inevitably damage other parts.?Cost avoidance creates important strategic value?because it?often targets strategic spend like new investments or technologies that?haven't any?comparable purchase?for example.

3. Implemented Cost Reduction: Streamline the tangible costs savings

Cost reduction is central to the procurement KPIs of the cost management dashboard. It is about the tangible “hard savings” that you simply have performed in terms of cost management over the years. Then, it is easy to measure them by comparing the old costs versus the new ones for an equivalent good or service. There are plenty of best practices to adopt to scale back the costs: you'll streamline your supplier lifecycle management, increase efficiency by leveraging supply chain analytics, or train your staff on the way to save costs.

Continue reading the full blog here.