With the right approach, procurement teams can increase the chances they accurately project spend.
8 Procurement KPIs you should be tracking
As a purchasing manager, it’s essential to strategize effective procurement. Your goals are to lower costs, reduce unnecessary spending, ensure compliance, and accelerate procurement cycles, among other strategic objectives.
Those are great goals. But how can you know for sure whether you’re actually accomplishing your procurement KPIs (key performance indicators)? It’s not enough to simply state your objectives. You need to be able to track results so you can measure your progress and determine which procurement areas can be improved even further.
By leveraging analytics to track the following eight procurement KPIs, you will be able to clearly see whether your procurement team is delivering value as planned. That way, if the numbers leave something to be desired, you’ll know what to focus on next.
The more cost savings you can 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 and ensuring that all purchasing occurs with strategic vendors that offer the best value. Don’t forget to factor in 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 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 a regular 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. Streamline and automate 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, which correlate to your cost avoidance KPIs. 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 and per replacement toner cartridge while ensuring you have the right printer 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, making it an essential procurement KPI to track.
5. Total spend by vendor
This procurement KPI provides procurement teams with a number of benefits. For starters, you’ll find out how many suppliers you depend 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 these expenses aren’t offset by sustainable cost savings or cost avoidance, do these investments make sense? This procurement KPI enables you to demonstrate very clearly that your initiatives are adding value to your business.
7. Purchase order cycle times
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.
Making tracking procurement KPIs easier with technology
By tracking these eight procurement 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 too much work? It doesn’t have to be.
With the right procurement solutions in your tool belt, processes are automated. You’re equipped with the visibility and procurement analytics to stay on top of the KPIs you need to track in order to ensure your purchasing efforts are successful. Fraxion's procurement software gives you the information to decide if you need to incur costs, when you need to incur them and the optimum quantum.
Click here to learn more about top procurement solution considerations you should prioritize to enable and monitor your KPIs with ease.