Key Performance Indicators

Key Performance Indicators can support an efficient purchase process and is integral to your business’s sustainable growth. Removing these inefficiencies from your procurement process can do absolute wonders for your operations, including:

  • Reducing general overhead and transaction costs.
  • Increasing the value derived from your supplier base.
  • Mitigating those pesky regulatory and brand-related risks.

Identifying and addressing these insidious inefficiencies are among the most difficult challenges procurement teams face. This brief guide looks at measurements you can use to locate and rectify your procurement process inefficiencies.

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Key Performance Indicators (KPI’s) for Standardized Procurement:

Key Performance Metrics or Key Performance Indicators (KPI’s) -- depending on who you ask -- are measurements you can use to evaluate various aspects of your supply chain and procurement management. Measuring KPI’s allows your team to identify areas of improvement and formulate actions to restore (or introduce) efficiency to your procurement process. Here are some of the basic and most important supply chain KPI’s/KPM’s you will see in any business that relies on procurement operations:

Procurement ROI

Procurement return on investment (ROI) is a metric that compares your procurement department’s costs with the total operational and financial savings it generated for the year. Unlike normal ROI, procurement ROI actually focuses on the capital resources the procurement team saved. Generally speaking, PROI indicates the overall performance of your procurement team. Use this metric to indicate the profitability of your procurement investments.

Cost per Purchase Order

The cost per purchase order is a critical metric that measures the average cost of processing a single order. It includes not only order-related expenses but all the expenses in the procure-to-pay cycle, including staffing and infrastructure costs. 

To calculate this KPI, add the expense at every point of the procurement cycle together and divide the sum by the number of Purchase Orders made. This will give you the cost (averaged) for a any given purchase order. Anything you can do to reduce this number will spell big returns on your bottom line. For example, manual, paper-based invoicing represents a procurement process inefficiency, and is generally quite expensive both in time and money. Automating your invoice generating and matching will likely reduce your cost per purchase order significantly.

Supplier Lead Time

Supplier lead time is the average time it takes for a supplier to ship goods after receiving the order. An optimal supplier lead time depends on your industry and order quantities and can vary from days to months. You can reduce supplier lead times by implementing a rigorous supplier vetting process, early supplier engagement, pre-negotiated terms, or increasing order frequencies. A vendor portal notifying your supplier to expect reorders can be an effective way to eliminate this inefficiency.

Supplier Defect Rate

Ideally, your business should only transact with vendors who deliver high-quality goods and products. The supplier defect rate calculates the percentage of goods from all suppliers that don’t meet your quality expectations. 

When a supplier defect rate exceeds what you expect, it means that a large amount of supply from this vendor is unusable. Chargebacks can address the issue when you receive a defective item, but if the issue persists, consider changing suppliers to reduce this defect rate. Every defective item you receive jams up the supply chain, costs labour, and ultimately harms the bottom line of a business because that item can never be sold.

Supplier Availability

Availability of stock is vital to an efficient procurement process. If your supply chain has a throughput problem, it means you can’t meet your customer’s demand. Supplier availability measures the number of times the supplier had goods available for shipping as a percentage of the number of orders you placed. If a supplier’s availability is lower than 90%, as in the supplier could only meet 9/10 of your orders, consider placing reorders earlier. You may also want to look into additional suppliers to ensure your shelves remain stocked.

Purchase Order Accuracy

This critical KPI is the percentage of orders with errors relating to:

  • pricing
  • quantities
  • delivery dates
  • addresses
  • line items
  • supplier data

and more over a specific period. The purchase order accuracy of an efficient procurement process depends on various factors, including your industry and the nature of the errors. Reducing these inefficiencies will raise your Procurement ROI that we mentioned earlier. If you'd like to know more about Key performance indicators, check out!

E-Procurement: Gather Data to Streamline Procurement

You can significantly increase your business’s profitability by implementing an effective procurement process as a central platform that all stakeholders can access. Strategic outsourcing is also a viable option to eliminate procurement process inefficiency, provided that the procurement professionals you hire use the right software. 

Current SCM is an all-in-one procurement solution for third-party service providers. Whether you are a business looking to streamline your procurement process or a procurement provider who wants to provide your clients with high-end solutions, get started with Current SCM today

Related Reading: What You Need to Know About Direct vs. Indirect Procurement

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