Procurement

Measuring procurement performance: a complete list of KPIs

Procurement key performance indicators (KPIs), also called metrics, are designed to measure performance and effectiveness of procurement management. Procurement KPI is a measurable value that tracks all relevant aspects of purchasing or acquiring goods and services. We've all heard the saying "what get smeasured, gets managed". KPIs enable Procurement to manage and improve its quality, timing, costs, customer satisfaction and sourcing practices. They aim to highlight to what extent procurement is contributing to business success or where it is falling short. Well thought out KPIs identify savings opportunities, manage supplier risk, and streamline procurement activities across business units. A visual dashboard enables you to track and communicate KPIs in real-time and identify opportunties for improvement.

We have put together a complete list of procurement KPIs to pick and mix from. The most important KPIs, across most businesses right now, fall into these five groups:

  • Cost savings
  • Spend under management
  • Supplier performance
  • Operational KPIs
  • Employee related KPIs

  1. Cost savings

Most procurement professionals will agree that cost reduction is their #1 objective. Cost savings are the cumulated negotiated savings and discounts that are achieved based on an agreed baseline. Cost savings are achieved through aggregating spend across business units or regions. Consolidating or renegotiating contracts takes advantage of volumes and standardization. These savings have a direct impact on the bottom line.

See 11 cost saving strategies for procurement: Cost Reduction Strategies in Procurement

Kearney’s 2020 study “Assessment of Excellence in Procurement (AEP)” surveyed 260 companies across a range of geographies and industries. They asked about where procurement was a key driver of their business strategies. 100% of leading companies said price reduction via sourcing and negotiations.

kearney value created by procurement     kearney labels

Graph source: Kearney Assessment of Excellence in Procurement (AEP) study, 2020

Total cost of ownership (TCO) is a methodology that considers all costs, direct and indirect, that are incurred for a purchase during the entire procurement lifecycle. It includes the original purchase price, plus any operating costs, process change costs, delivery costs, maintenance, and disposal costs. TCO looks at the bigger picture and considers the total value of the product or service over time. TCO is a valuable KPI for procurement because it provides a total cost basis for the item or service. TCO enables comparison of different sourcing options as well as make-or-buy decision-making.

Cost efficiency can result from “hard savings” and cost avoidance. Hard savings are verified savings that can be taken into account in budgeting. Cost avoidance is regarded as the “soft savings” that results for instance from avoiding a market price increase with negotiation. There is no consensus on whether this measure delivers real value for an organization as the financial benefits are not easily verifiable.

More on procurement savings types and definitions: What are procurement savings: definitions, saving types and calculation examples

  1. Spend under management

Another important indicator of procurement success is what portion of the spend (%) is actively moving through procurement versus spend that is outside its control. Spend under influence often means more sourcing and savings opportunities identified by procurement. No influence means lost opportunities and uncontrolled costs as the “big picture” of the spend category might be limited.

The target may be set at an overall % or be based on % of spend under management per business unit/region/category of purchases only. Many large organizations aim for up to 80% of spend under management. Where spend under management is high, procurement’s influence extends beyond savings to improving visibility of spend and reducing supplier risk. Reducing supplier risk results from improved use of frame agreements, compliance with procurement processes and higher use of audited suppliers. Looking into “maverick spend” outside of procurement influence can help identify where could be potential for strategic sourcing and closer collaboration with procurement. Tracking the number of sole source suppliers can indicate the chance of potential supply risks and disruptions. Best practice in spend management integrates and automates data management for better decision making.

  1. Supplier performance

Leveraging supplier performance is one of the key drivers for procurement. Important supplier KPIs are those related to quality, service levels and compliance. The aim is to limit risk, improve performance, manage quality, improve value to customer, minimise disruptions and hold suppliers to account.

Supplier KPI examples include:

  • Overall spend per supplier
  • Order fill rate / supplier availability
  • Average lead time
  • Lead time variance
  • On-time delivery
  • Delivery accuracy
  • Defect rate
  • Number of reclamations
  • PO and invoice accuracy
  • Compliance to contract
  • Audits and corrective actions
  • Communication lead time 

Following up number of sole source suppliers can indicate potential supply risk in case of disruptions. Tracking the number of suppliers on the database can show how many are active, in which categories, and where there is unnecessary overlap. Traditionally, the aim has been to reduce the number of suppliers to reduce administration cost, but this is changing fast due to advancements in software solutions. Increasing the number of suppliers can reduce risk, promote diversity and satisfy new market demands.

  1. Operational KPIs

Operational KPIs aim to establish what is happening in the day-to-day business to identify possible improvement areas. The responsibility of proving the results and value of procurement is on CPOs. To showcase this, you can identify where processes, people or systems are performing well and where not-too-well so that you can take corrective action and focus on what matters the most.

Procurement Return On Investment (ROI) showcases the ratio between the cost of procurement and savings or business value delivered. Cycle time is another measure of procurement efficiency. Cycle time tracks how long a certain task or activity takes to complete. The sooner you sign a contract or execute a project, the sooner you implement savings and satisfy your business stakeholders.

Operational KPIs include:

  • Number of suppliers
  • Number of approved suppliers
  • Number of invoices
  • Number of purchase orders (PO)
  • Rate of emergency purchases
  • Inventory value
  • PO coverage
  • PO cycle time
  • Contract coverage
  • Average payment term
  • Payment term accuracy
  • Time taken to award tender from sourcing request
  • Time taken to negotiate a contract from tender award
  • Procurement ROI
  1. Employee related KPIs

Leading procurement organizations use KPIs to measure employee performance which also lays the basis for their reward programs. These measures are not as robust as operational or cost-saving KPIs as they relate to human efforts and behaviours. To establish employee KPIs it is important to benchmark within the industry to set a baseline.

Employee related KPIs include:

  • Cost savings per employee
  • Spend under management per employee
  • Number of suppliers managed per employee
  • Number of sourcing projects per employee
  • Number of contracts managed per employee
  • Number of new contracts negotiated per employee
  • Number of training hours completed per employee
  • Customer satisfaction within organization

Summary of 5 most important KPI groups with examples:

infopraph KPI

What KPIs will we track next?

Kearney’s 2020 study also looked forward, asking their respondents where procurement would be key drivers of their business strategy in future. 80% of the replies from leaders included supply risk management specifically, and 60% highlighted both sustainability and innovation.

kearney table

Graph source: Kearney Assessment of Excellence in Procurement (AEP) study, 2020

 Sustainability

Setting KPIs for supply chain sustainability is a work in progress. Measuring responsible sourcing at suppliers is evolving. Areas of focus are social responsibility, labour practices, work safety, non-discrimination, modern slavery, anti-bribery, environmental footprint of transport and logistics, utilities including renewable energies and water conservation.

Sustainability KPIs include:

  • Compliance with Code of Conduct
  • Compliance with UN global conduct
  • Compliance with environmental standards
  • Number of suppliers that filled in self assessment questionnaire
  • Number of suppliers audited
  • CO2 emissions reduction
  • Waste reduction
  • Plastic reduction

Sustainable sourcing will continue to develop and the KPIs must follow. We are starting to see evaluations of a supplier’s commitment to sustainable sourcing and its implementation of policy and processes. Many suppliers are willing to show initiative in the hope of improved reputation and greater market share.

Diversity and local sourcing

There is a growing trend towards more inclusivity. Companies are adopting diversity programs to make a positive impact where they operate, but also to harness the added revenue and innovation opportunities it brings. Minorities, non-discrimination and rights of the vulnerable groups were in the past taken into account as part of the corporate social responsibility (CSR) programs and reporting of companies. As the awareness is increasing, diversity programs have been differentiated into specific development areas to follow. The next step is to evaluate diversity performance and make improvements to drive business growth and do good in the world.

Leading organizations are starting to track include:

  • Minority owned enterprises (MBEs)
  • Woman-owned enterprises (WBEs)
  • LGBTQIA+ -owned businesses
  • BAME (Black, Asian, and Minority Ethnic) owned businesses
  • Small- and medium-sized enterprises (SMEs)
  • Number of companies in each of the above categories
  • Above categories share of total spend

Conclusion

There is no definitive list or ranking of the most important Procurement KPIs. Some are more important than others in different industry sectors, e.g. measuring the number of undamaged shipments, delivery accuracy and on-time deliveries are both critical in retail e-commerce, not so much in professional services. For professional services measuring customer satisfaction and service level could be more relevant. In addition, maturity of the procurement organization impacts on most important KPIs to follow. 

The trend towards managing a larger number of KPIs has driven procurement organizations to invest in software-as-a-service (SaaS) technologies, addressing spend analysis, P2P transactional tracking, supplier relationship management and contract lifecycle management.

 

Picture by: Alexandr Bormotin

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