Humans have a tough time evaluating ourselves. Cognitive bias, denial, and delusion can blind us to our faults and lead us to overestimate our skills. Sadly, those biases don’t vanish when it’s time to evaluate the performance and productivity of a business—but they are a little easier to overcome thanks to the power of key performance indicators, or KPIs.
By helping you establish, monitor, and tweak the metrics that matter most to the success of your business, KPIs help you streamline and optimize processes, boost productivity and profits, and maximize your return on investment (ROI). As they are essential to the smooth and effective function of your business as a whole, procurement KPIs have particular importance.
Why Procurement KPIs Matter
When it comes to both cost avoidance and cost reduction across your supply chain, knowing what to measure, and how often, is a crucial component of a successful procurement strategy. The procurement KPIs you track, using a process called procurement benchmarking, will touch on everything from lead time to supply chain management to total spend for your company, all in support of the best possible procurement ROI.
As a result, it quite literally pays to ensure your procurement department is focused on providing everything your organization needs to achieve optimal productivity and profitability while still achieving significant cost savings and healthy, strategic supplier relationships. Generally speaking, implementing a modern procurement solution, equipped with automation powered by artificial intelligence (AI), can make both tracking and improving your procurement KPIs much easier and more effective.
The procurement KPIs you track, using a process called procurement benchmarking, will touch on everything from lead time to supply chain management to total spend for your company, all in support of the best possible procurement ROI.
Critical Procurement KPIs
To keep things relatively simple, you can sort your procurement team’s KPIs into three broad groups:
- Order Processing KPIs, including:
- Purchase Order Cycle Time
- Average Cost of Processing a Purchase Order
- Lead Time
- Supplier KPIs, including:
- Number of Suppliers
- Supplier Availability
- Supplier Defect and Compliance Rates
- General Procurement KPIs, including:
- Procurement Cost Avoidance and Reduction
- Employee Performance, Training, and Certification
- Total Procurement ROI
Order Processing KPIs
Purchase Order Cycle Time
The faster and more accurately a purchase order is processed, the more quickly payment can be made, and the less time and money is spent on dealing with exceptions and errors. This KPI measures PO processing time specifically, from PO creation through payment (i.e., procure-to-pay, or P2P). A tighter cycle is better, and knowing how much time is required to issue, approve, process, and pay purchase orders to each of the vendors in your supply chain makes strategic sourcing much easier, too.
This KPI measures PO processing time specifically, but also provides a good yardstick for your procurement organization’s overall efficiency. It benefits immensely from automation—in some cases, costs can be reduced by as much as 75%, while processing times drop from days or weeks to hours.
Average Cost of Processing a Purchase Order
Streamlining your P2P process means lowering the cost as well as the time required. Because every business is different, savings will vary wildly. But while the average cost of processing an invoice can vary from less than $50 to hundreds of dollars, what matters is measuring the accumulated costs associated with the time required to process each purchase order, itemized by each task performed, and how many staff are required to complete the task.
This metric uses Full-Time Equivalent (FTE) employee spend as a unit of measure. FTE can be used to combine and convert the work of multiple employees into the hours worked by a full-time employee. As with PO Cycle Time, lower is better here.
Automation helps convert P2P into a largely touchless process, freeing your staff to deal with more profitable high-level tasks. The fewer staff hours you have tied up in your P2P, the greater your efficiency, and the lower your overhead, will be.
3. Lead Time
This metric combines and measures both administrative lead time (time required to request, approve, and process the order) and production lead time (time required to fulfill an order with the goods requested). Note that this is distinct from PO cycle time, which ends when payment is made, rather than when goods are received.
The trick with this metric lies in balancing speed and economy against quality. It benefits directly from procurement software’s ability to track vendor performance, availability, and compliance, allowing you to directly compare each supplier’s ability to meet your organization’s needs in the least amount of time, and at the lowest cost.
Number of Suppliers
Running “lean and mean” is an appealing strategy to the cost-cutting mind, but depending on too few suppliers can be even more costly than the potential bloat (and lack of tempting discounts and strategic partnerships) created by having too many.
To take full advantage of your supply chain’s potential, you can use automation to enhance and simplify supply chain management. A centralized system gives you short- and long-term visibility into which vendors are essential, those who have the potential to become strategic partners, and those who need to be rehabilitated, replaced, or simply removed. Plus, a standardized list of approved vendors weeds out rogue spending and reduces your risk exposure.
When the going gets tough, can your vendors rise to the occasion? How well does each supplier meet your delivery time, quality, and quantity requirements? This KPI measures each vendor’s ability to meet your evolving needs.
The centralized, transparent, and accessible data library created by an AI-driven procurement suite can help you set a benchmark for supplier availability, such as 85%, 90%, or even 95%. You can then easily organize your supply chain by service level to ensure critical orders are routed to your most trusted suppliers automatically.
Supplier Defect and Compliance Rates
It doesn’t matter how quickly or cheaply an order is fulfilled by a vendor if the quality is lacking or your supplier fails to meet legal requirements for production, delivery, or materials. Measuring the percentage of non-compliant (i.e., defective) shipments received from a given vendor, these KPIs helps you track your suppliers’ quality and compliance performance.
Procurement software solutions expand your insight into this KPI by allowing you to granulate quality issues by type, and sort vendors by performance and impact on your own production as well as overall associated costs. Those suppliers who can regularly be relied upon to provide the highest quality goods and full compliance with both your company’s requirements and the law (and at the best possible price) can be made preferred vendors or engaged to become strategic partners.
General Procurement KPIs
Procurement Cost Avoidance and Reduction
These metrics work hand-in-glove to track the costs generated by not spending money and those generated by spending less money to improve the Total Cost of Ownership (TCO) for all company procurement, direct or indirect.
Cost avoidance tracks items like preventative maintenance, process optimization, and contract renegotiations to reduce or eliminate price increases from suppliers. It can be thought of as intangible savings, since it only appears on the balance sheet if it doesn’t occur (thus creating a cost increase compared to the original or revised cost estimate).
Cost reduction is more concrete and tracks things like staff reductions and lower negotiated prices for raw materials or goods and services used by your company. These tangible savings are recorded on your financial statements and have a more direct impact on your bottom line.
Thanks to cross-checking and centralized data management, both of these KPIs are easier to track with procurement software, since all transaction data, contract data, supply chain management data, and the reports and analytics generated from them are connected.
Employee Performance, Training, and Certification
Measuring how much it costs to get your team on board through training and certifications falls under this KPI. Examples might include the cost of training your team on using a procurement software package, certification fees for higher-level procurement staff, or process improvement seminars.
Measuring this KPI can help you identify which team members are producing the biggest return on your training dollar, opening up opportunities to reduce costs further through internal training or even consolidation of duties.
Total Procurement ROI
Built on a simple formula, this KPI nevertheless has a profound effect on your company’s wellbeing.
To find the procurement ROI, use the following equation:
(Annual Investment Gain – Annual Investment Cost) ÷ Annual Investment Cost = Procurement ROI
In short, this KPI measures the overall financial performance of your procurement function. As a rule of thumb, you should aim for your annual procurement investments to yield a 10:1 return.
This metric provides an excellent “mile high” view of your department’s performance and impact on the company’s overall profitability. It’s important to remember, however, that no single metric can provide you with the nuanced and precise picture required to chart a successful procurement strategy.
Measure, Monitor, and Modify for Procurement Success
Sitting as it does at the heart of your business, your purchasing department needs to be as efficient, effective, and evolved as possible. To do so, it needs to focus on cutting costs, boosting productivity, and building value to support your company’s goals and build a better bottom line.
By zeroing in on the KPIs that give you a window into your procurement processes and taking advantage of the toolset that comes with a software solution, you can automate and optimize every aspect of procurement for a healthy, nimble, and profitable business.