Demystifying Procurement Key Performance Indicators (KPIs)February 12, 2015
Key Performance Indicators (KPIs) – As the name suggests, are quantifiable measurements, agreed to beforehand, that reflect the critical success factors of any company. They are a way to measure progress towards set goals of any department or function. However, at few places, one can find them in the form of qualitative measurement too.
Ever since the first rumblings of the global financial crisis, businesses have been feverishly stripping out costs; headcount reductions have been the most typical immediate reaction to cost reductions, but companies have also become acutely aware of the potential sustainable cost savings to be had across the supply chain. And this is when Procurement became a full-fledged function rather than just being a service. Starting here, the expectations from Procurement changed over time. Corporate Procurement Officers are now increasingly looking into Procurement to engage the business in strategic conversations about how the supply chain can be optimised to deliver the greatest returns. And here, the role of KPIs comes into play.
In practice, it is best to keep KPIs quantifiable and pre-defined so that you can have a numeric comparison as well as conclude to a trend analysis over the years. Some of the top procurement KPIs are stated below:
1. Total Cost
This is the aggregate amount of money procurement saves by reducing the total cost of ownership from one year to the next excluding changes in volume. This measures the contribution to the financial success of the company.
This measures how well the procurement department gets what the organization needs when it needs it – Delivery to promise date, Delivery to (original) schedule date and even Delivery to rescheduled dates.
3. Cost Avoidance
It is a cost reduction that results from a spend that is lower than the spend that would have otherwise been required if the cost avoidance exercise had not been undertaken.
4. Implemented Cost Reduction Savings
As opposed to ‘identified’ or ‘pipeline’ cost reductions, this KPI measures negotiated savings that have actually been realised and implemented by the company.
5. Procurement Cycle Time
It is the average time it takes between requisition submission and purchase order placement is one measure of procurement cycle time. Another cycle time that can be measured is the time it takes from the beginning of a sourcing process to the time that a contract is signed.
6. Percentage of Active Suppliers
It ideally accounts for 80% of total spend. This KPI measures the current state of supplier consolidation and activity within supply base from the previous year. New product introductions may impact this metric, changes in sales within the product portfolio may have an effect as well. This KPI drives efficiencies within the procurement function and drives down costs/POs.
7. Procurement ROI
This KPI measures the procurement department’s cost effectiveness. This is measured by comparing implemented cost savings to the procurement department’s operating budget.
8. Managed Spend as a Percentage of Total Spend
Managed spend is the amount of spend that the purchasing department influences through the strategic sourcing process. Total spend is the amount of money companies spend on products and services each year. This does not include labor cost. Spend under management is as high as 85% in companies with best in class strategic sourcing solutions.
9. Contract Compliance
This KPI measures compliance to contract service level agreements (SLA’s), contract terms and conditions, and pricing agreements. This metric is used to benchmark supplies’ compliance to the standards they have negotiated.