As a purchasing manager, you’ve decided to do everything within your power to make your company’s procurement team as efficient and effective as possible. Your goals are to lower costs, reduce unnecessary spending, ensure compliance, and accelerate procurement cycles, among other things.
That’s a great start. But how can you know for sure whether you’re actually accomplishing your purchasing KPI (key performance indicator) goals? It’s not enough to simply announce your good intentions. You need to be able to track results so you can measure your progress and figure out which procurement areas can be improved even further.
By leveraging procurement analytics and tracking the following eight key performance indicators (KPIs), you will be able to clearly see whether your procurement team is delivering the value-add you plan. That way, if the numbers leave something to be desired, you’ll know what to focus on next.
The more cost savings you’re able to achieve, the happier upper management will be with your procurement strategy. Keep track of whether you’re able to get better prices by switching vendors. Don’t forget to focus on the total cost of ownership (e.g., delivery costs, supplier management, life cycle costs, etc.) and consider the time value of money. To arrive at your true savings figures, you also need to remember to include the unavoidable cost increases (e.g., energy or inflation) in your calculations.
2. Cost reduction
The hunt for cost reductions makes negotiating better prices on products and materials is a normal part of a procurement manager’s duties. But one area you may not be looking at hard enough is efficiency improvements to reduce the cost of labor associated with procurement. Search for ways to streamline and optimize processes and track the labor saved. Reduce the overall cost of procurement by eliminating the need to hire additional staff. Track process optimizations and the associated labor cost reduction with your negotiated product/materials cost savings to get a clearer picture of your overall cost reduction.
3. Cost avoidance
Are you sourcing better supplies, equipment, and services? If so, you’re avoiding a lot of unnecessary expenditures. For example: Say you’re shopping for high output laser printers for the office. Look beyond the average per-page cost and weigh the total cost of ownership over time. Use a collaborative approach to communicate with your team on the true cost: average maintenance, provided warranty length and coverage, as well as reviews and known issues. Then work with multiple vendors to ensure you can get the best price per unit, per replacement toner cartridge and have the right printer for the right job for your entire team. It might come at a higher upfront cost, but you can now track your potential savings over time, avoiding the higher long-term ownership costs of a lesser quality discount printer.
4. Maverick spend
How many of your employees have “gone rogue” before, purchasing something without going through the proper approval channels? Probably more than you think. According to one report, 54 percent of employees admit they’re guilty of maverick spending. In order to optimize your procurement efforts, you need to drastically reduce—if not eliminate altogether—rogue spending. By one estimate, a 5 to 10 percent reduction in maverick spending can translate into millions of dollars of cost savings at large organizations. Track maverick spending to chart your progress.
5. Total spend by vendor
This KPI provides procurement teams with a number of benefits. For starters, you’ll find out how many suppliers you’re depending on. If you’re dealing with a ton of different vendors, there’s a good chance that you’re not getting the best deal from any of them. By consolidating the number of vendors you work with, you increase the chances you can lower your costs by sourcing materials and services more affordably.
6. Procurement ROI
Are your organization’s procurement investments worthwhile in the first place? If you’re spending a great deal of money to optimize your procurement efforts but those expenses aren’t offset by the cost savings and cost avoidance you realize, do those investments make sense? This KPI enables you to demonstrate very clearly that your initiatives are adding value to your company.
7. Purchase order cycle time
How quickly is your company able to place a purchase order? According to a recent study, best-in-class organizations take only five hours—about one-half of a business day—to send a PO to a supplier. Companies at the other end of the spectrum can take as long as 15 hours—almost two full business days. The quicker you’re able to place a purchase order, the more effective and agile your organization will be.
8. Contract compliance
Are you paying the prices that you’ve agreed to pay? Are you getting the service-level agreements you signed up for? Negotiating price savings and better services is great. But if vendors aren’t actually following through with those agreements, what good is it? The closer to 100 percent compliance, the better.
By tracking these eight KPIs, you can prove beyond a doubt that your efforts are paying off—justifying your organization’s procurement investments.
Worried that staying on top of these KPIs is a lot of work? It doesn’t have to be.
With the right procurement solutions in your tool belt, it’s quite easy to use procurement analytics to stay on top of the KPIs you need to track in order to ensure your purchasing efforts are successful. When you notice you’re not performing as strongly as you’d like to in a certain category, you can take immediate steps to remedy the situation—creating a procurement process that is continually improving.