Procurement sustainability and ways of improving the procurement process are the two main concerns of almost every procurement organization. In such a scenario, management tools like Procurement KPIs (Key Performance Indicators) help a great deal in monitoring procurement department performance and helping meet goals, strategies and objectives. KPIs also help
- Improve performance levels
- Identify breakdowns in a process
- Drive continuous improvement for more efficient and sustainable procurement processes.
KPIs should ideally be simple, relevant and easy-to-use.Key performance indicators (KPIs) can be used to analyse data based on performance objectives and set actionable goals for improvement. KPIs are SMART (specific, measurable, attainable, realistic and time based) criteria developed in conjunction with suppliers and others used to measure the essential elements of the process. These measures can be developed at any time, but are often agreed at the beginning of a contract. It is important to agree measures which can be assessed easily, in terms of the availability of the data as well as the data itself being objective and beyond dispute of either party. The KPI’s used will differ from organisation to organisation, but the Oxford College of Procurement and Supply lists the following as some of the commonly used indicators, based on quality and cost data:
KPIs for Quality
Defect Rate – Used to measure the amount of product faults, this KPI may be measured as faults per unit or defects per million.
Procurement Cycle Time – The length of turnover time between placing the purchase requisition and the purchase order being sent – this includes time taken to request quotes from several suppliers and choose a winning supplier for the job.
Delivery Schedule – This KPI evaluates the quoted delivery time compared to actual delivery time, and how it impacted your own product schedule.
Compliance With Original Contract – Based on the negotiations agreed at contract signing stage, is the supplier keeping to agreements on pricing, Ts & Cs, delivery times, etc?
KPIs for Cost
Cost Savings – This KPI is typically used to measure the % cost saving on each order via negotiations.
Cost Avoidance – Entering into long term pricing contracts, for example, is one of the many measures that procurement professionals can take to reduce future costs as well as improve short term cost savings. If these measures are taken, the cost avoidance KPI can be used to measure the future cost savings.
Managed vs. Total Spend – Compares the money spent on managed purchasing processes (with long term suppliers with who the company has a relationship) to the total amount spent by the company (minus staff costs) over a quarter.
Procurement ROI (Return on Investment) – This KPI compares the purchasing department’s budget with cost savings they have made, therefore measuring the department’s cost effectiveness. It’s a measure of the cost effectiveness of the department.