Cost containment as an organizational strategy just makes good financial sense and is easily attainable through best-in-class spend management...
Procurement benchmarking: Translating purchasing KPIs into better performance
Today, procurement processes have evolved into business functions critical to an organization's overall growth and profitability.
For procurement managers to identify savings opportunities, add business value, and prioritize areas of improvement, they have to compare their performance against the industry's best practices. Indirect procurement benchmarking enables organizations to measure their purchasing performance and compliance against clear standards (attainable from third-party research analysts and platforms). By measuring this, procurement teams gain long-term data to inform decision-making, strategize their procurement efforts, and achieve their goals.
In this blog, we’ll explore the importance of procurement benchmarking and the essential purchasing key performance indicators (KPIs) companies use to measure their purchasing performance.
Why is indirect procurement benchmarking important?
An effective indirect procurement benchmarking process can help your organization meet its goals, build value, and achieve an optimal ROI for every dollar spent. There are several reasons why organizations benchmark their practices within their industry to succeed.
Increased effectiveness and efficiency
Procurement benchmarking enables organizations to identify areas that require improvement internally. When you can see your current KPIs, how your organization is improving over time, and other companies’ performance, you get insights on how you can make your procurement processes more efficient and effective.
Set clear business goals
Performing regular procurement benchmarks provides a gap analysis and allows you to develop measurable business goals for your organization. Once you establish a plan of action for achieving your goals and understand processes that need to be improved or corrected, you not only define success, but also develop innovative and impactful business strategies.
Discover new opportunities
Another benefit of procurement benchmarking is that it helps you discover new opportunities for increasing business growth and success. By assessing what purchasing KPIs you need to prioritize to remain successful regardless of the economic climate, you can develop strategies to boost performance and leverage new opportunities.
Evaluate your organization’s tech stack
By benchmarking your organization’s performance over time and comparing it to industry standards, you can adequately assess the efficacy of your procurement solution.
Is your solution helping your organization achieve its business objectives? Does it support and extend proactive control to the edge of your organization while facilitating the objectives of procurement, finance, and accounting departments? And is your team adequately trained to use its full scope?
Whether your next logical step is to replace an outdated procurement solution or simply reconfigure your system to provide better internal controls, having this benchmark data will inform your decisions.
As you assess your procurement solution, you can also review if it enables healthy adoption levels within your organization. If adoption levels aren’t strong, consider your system’s user interface, is it complex or easy to use? Simplicity is a key factor in driving adoption.
From there, you can determine if it’s solvable within your current system with additional training, or if you need to invest in more intuitive, modern procurement software.
Keep in mind that updating your procurement technology (and any business technology for that matter) to meet business needs is a worthwhile investment as it will increase productivity, accuracy, and efficiency while improving staff morale and job satisfaction.
Indirect procurement benchmarking best practices: Critical purchasing KPIs you can't ignore
Purchasing KPIs are essentially performance measurements that allow you to evaluate and monitor the efficiency of your organization's procurement management over time and against industry standards.
An ideal purchasing KPI should be relevant to your business goals and simple to track. Some purchasing KPIs that help you achieve your benchmarking goals include:
Number of suppliers
Track the number of suppliers your business deals with against the industry's best practices.
Your procurement team could have a single or multiple suppliers for a single item. To reduce dependency on a single supplier, consider having a few vendor options for business essential items. Doing this can also reduce risk and increase efficiency during times of limited supply.
However, purchasing from too many uncontracted suppliers reduces discounts and limits savings opportunities, which ultimately impacts your bottom line.
Benchmark supplier KPIs with those of successful competitors to determine the appropriate number of vendors to work with. You can further use procurement software to analyze: total spend by supplier, frequency of spend by supplier, price variations, and more.
With this data to inform your decisions, you stand to not only consolidate your supplier list to top-performing suppliers, but also increase your bargaining power to negotiate better pricing.
Percentage of spend under management
Spend under management refers to the percentage of total spend that is strategically managed by procurement. Monitor the percentage of spend under management no matter how small or large your organization is, or how many users interact with your procurement system.
By configuring policies within your organization’s procurement software, you can gain more spend under management and eliminate wasteful spending trends. Some actions you can take to improve this purchasing KPI are:
- Review and manage authorizers within the system
- Update your system’s spend policy, internal controls, and delegation of authority
- Automate alerts to flag non-compliance
- Configure collaborative vendor approval processes
- Set up budgets and highlight potential impact or risk at decision points
- Configure escalating approval workflows based on spend thresholds
- Review audit trails to see who is approving, changing, or rejecting requests
- Set up internal catalogs or PunchOut catalog integration to give your teams easy access to millions of products from approved suppliers
And these are only some of the actions you can take to get your organization’s spend under management. You can customize digital procurement software to proactively manage purchasing, expense, and approval processes to curb rogue spending, even as you're speeding up processes or scaling your organization.
As you get more spend under management and reduce rogue spend, the next logical metric to track is cost savings.
You can monitor cost savings as you implement all the procurement software features listed above, so you can fine tune your digital procurement strategy. By practicing cost avoidance, collaboration and relying on features such as RFQ (request for quotation) you can ensure that your team purchases goods and services at the best price. Always remember to strategically consolidate suppliers and purchase orders to save costs (like shipping costs) and get the best deals and volume discounts.
Analyze contribution to total spend
To better understand where your organization’s money is being spent and drive more cost savings, monitor KPIs related to spend contribution. Gain insights into indirect spending behavior, use your procurement solution to analyze spend by:
- Departments or cost centers
This data is invaluable and provides actionable insights that manual or spreadsheet tracking just could not enable. You can see what your departments and employees purchase frequently to run day-to-day business operations.
This might mean negotiating a new contract with a top performing supplier or consolidating purchase orders with one key supplier to leverage your purchasing power.
To boost efficiency, you can templatize repeat purchase requests and fast-track approvals via automated workflows - a fitting segue to the next important KPI you should be tracking.
Cycle times (and costs!)
Benchmark your organization’s productivity by calculating procurement and accounting cycle times and costs against industry standards. To get a full picture of your performance, consider monitoring:
- Purchase order and invoice cycle times
- Expense to reimbursement processing times
- Average requisition approval times
- And transactional costs (such as the costs to process purchase orders and invoices)
For instance, the purchase order cycle calculation includes all associated activities like:
- Requisition approval
- Purchase order creation
- Budget review
- Supplier review
- PO submission
- PO Matching and closure
Under performers take about 48 hours to process a purchase order, more than eight times as long as top performers. According to APQC's Open Standards Benchmarking data, optimal purchase order cycle times should take as little as five hours.
So how do you achieve this newfound efficiency throughout your procure-to-pay process? Use a procurement solution to digitize and automate workflows and enable collaboration. This will allow your teams to increase their productivity by up to 50% as they reduce associated transactional costs, errors, missing data, and even disputes.
Lastly, determine the ROI your organization’s procurement operations generate. You can calculate procurement ROI by subtracting your department’s costs from the total savings it generates, both financially and operationally, for the entire organization.
Not only does doing this give you a strong indication of your department’s performance, but it also demonstrates your department's value. And this metric acts as a great starting point if you need to build a roadmap to better procurement results.
Elevate your purchasing KPIs with a spend management solution
The most successful procurement departments excel by leveraging purchasing KPIs to measure and track their performance.
To optimize your procurement performance and achieve your KPIs, consider investing in digital tools like Fraxion. Fraxion offers true cloud spend management solutions for purchase requisitioning and approvals, expense management, AP workflow management, and spend analysis.
Our solution allows your organization to automate and streamline the entire procure-to-pay cycle with complete transparency and internal controls. Curious to learn more? Check out our recent blog on the key benefits of approval workflow automation.