If you’re not paying attention to your procurement KPIs, we’ve got bad news: You should be.
As a procurement or supply chain manager, you get pressure from above not only to cut costs but to improve long-term efficiency. So how can you accomplish this Herculean task? We’ll tell you—with KPIs. These are the most important metrics to measure progress within an organization.
It’s an age-old problem for every business. If you can’t measure performance, you can’t measure improvement over time. To put it frankly, ignoring KPIs is a detriment to your organization.
KPIs, or Key Performance Indicators, are critical metrics a company or organization uses to measure its overall performance. The primary purpose of measuring KPIs is to identify which areas need improvement and which areas perform well.
When you can reliably identify the processes and operations that need improvement, you can pinpoint precisely where to focus company resources to help your business flourish.
Measuring and acting on KPIs is critical for every business. If you can’t determine how you measure up to other competitors, or whether you’re improving or declining, how can you begin to grow and expand to new markets?
Simply put, measuring KPI metrics can be the solution if you’re ready to take your business to the next level. We’re not talking about just reducing costs, either. With these five essential procurement KPIs, you’ll have the data-driven results to start thriving, increase profits, and streamline day-to-day operations.
If you’re ready for your organization to move past surviving and start truly thriving, you can’t afford to ignore these KPIs. As a purchasing manager, you need a selection of fundamental KPIs in your repertoire to continually measure and evaluate. These will provide a clear picture of your team’s procurement performance.
KPIs should be relevant and provide helpful information. Your team needs to study the most important key performance indicators to get an accurate measurement. Finding and measuring the proper KPIs can mean the difference between success and failure for the procurement department.
Here are the top five critical KPIs for continued success and the capability to adapt with the times.
1. Purchase Order Accuracy
If you’re not achieving 100% accuracy on your purchase orders (POs), you could be losing thousands of dollars. Human error is one of the most significant causes of rising operating costs. That’s why you should implement fully digital processes and automation for every PO the company generates.
To evaluate your suppliers, you can measure PO accuracy across several areas. Ask questions like:
2. Purchase Order Cycle Time
Purchase order cycle time is the amount of time between when a department places a PO and when the order actually gets submitted. The cycle time on the high end of this essential KPI would be less than 5 hours. Taking as much as 24 hours puts your business on the low end.
One of the best ways to reduce cycle time is by automating as much of the PO process as possible. For instance, switching to electronic PO handling could mean a dramatic cycle time reduction, translating into considerable cost savings for your organization.
When cycle time is low, the entire supply chain operation moves faster, making it easier to fulfill the efficiency needs of the business. In addition, lower cycle times lead to smoother operations and increased satisfaction for your customers.
3. Cost Reduction
Leveraging cost reduction is the core of KPIs. Of course, every business wants to save money. It’s all about procuring the goods and services you need for your clients while paying the lowest possible price. The plain truth, though, is that the ability to attain that perfect balance separates the truly successful procurement teams from the flat-out unsuccessful ones.
So, how can you implement cost savings in daily operational processes? You have a few different choices. The first one is automation.
By taking tedious, labour-intensive processes that are prone to human error and transforming them into automated processes, you can then apply all that wasted time and effort to more valuable tasks. Also, automation virtually eliminates the risk of costly human error, a huge problem area for many businesses.
Use Long-Term Data Analysis for Maximum Cost Savings
Another way to implement cost reduction throughout operations is with long-term cost data analysis. Managers can easily review cost history helping to make informed decisions on material trends and to utilize long-term supplier relationships to realize savings.
4. Vendor/Supplier Performance
Your suppliers are a critical link in the procurement chain. Surprisingly, many businesses don’t take opportunities to strengthen their vendor base. Too many procurement managers will simply renew contracts with suppliers. Instead, be sure to continually re-evaluate your supplier contracts and relationships.
By looking at your supplier’s KPIs, you can hold them accountable for the areas that need improvement. For instance, you might be better off with fewer vendors who all have a stronger relationship with you, than with lots of vendors that you don’t know very well. It’s vital to use data-driven results from essential KPIs to explore this.
Supplier Lead Time
Supplier lead time (also called vendor lead time) measures the overall time it takes to fill an order. More specifically, it’s the time between when a vendor receives your PO and when it ships the order. This KPI measures in days, and you can find it by subtracting the PO time (when the actual PO was received) from the delivery time (when they delivered the product or service).
Measuring this KPI allows you to pinpoint areas with poor performance. Once you know where you need improvement, we’ll create actionable strategies for you to streamline your supply chain and procurement process.
5. Procurement Return on Investment (ROI)
Procurement ROI is an internal KPI that measures the performance of your entire procurement department. You can’t measure improvement if you don’t have the data for comparison, which is why this KPI is one of the most important.
This KPI measures the total amount of annual savings your procurement team generates. But here’s the catch—you need to analyze this data in light of the entire department’s budget to get relevant information that you can use to improve processes.
Once you calculate the total cost reduction the team has generated, that number becomes your procurement ROI. It’s an invaluable tool for evaluating your procurement team’s effectiveness at cost savings.
You can also look at total spend versus budget, either within the procurement department or throughout the entire organization. That’s why analyzing this data is imperative to help you manage spending and ensure budgetary accuracy. You should also factor in the TCO, or Total Cost of Ownership, which is another key metric for measuring performance and overall ROI.
Although these are the essential five KPIs for measuring your organization’s success, they are only the tip of the iceberg. Essentially, you will benefit from taking each of these generalizations even further and customizing it to fit your particular business and its operations.
At Current SCM, we are experts at providing you with the solutions your business needs to thrive. Our analytics, reports, and dashboards capabilities enable you to manage your critical KPI metrics within an all-in-one third-party procurement & materials management process solution, with no more tedious spreadsheets and guesswork. Our user-friendly, revolutionary app provides you with a practical, all-in-one solution to your procurement & materials management problems.
Most procurement apps available today are P2P (procure-to-pay), but Current SCM isn’t like that - we designed our app for third-party procurement. It gives you unfettered access to all the most critical data so that you can manage your supply chain and procurement performance, all in one innovative app.
With that one app and our intuitive operation system, you can track any KPI at any level, small-scale or large. Keep in mind, there are no “good” or “bad” KPIs to measure because each one is important - you simply need to find the most critical areas that will help your business succeed and then focus your energies there.
That’s where Current SCM comes in. We’ll help your organization identify the areas with poor performance. Then, we’ll develop and deploy effective improvement strategies to integrate seamlessly with your existing processes. We designed our app to help with materials, vendor management, project management, requisitions, purchase orders, and more. Be sure to contact our team at Current SCM today to learn more about how our third-party software solutions can help you use procurement KPIs to take your business to the next level.