by martieLast Updated : Sep-19-2023
Are you a decision-maker in your company’s procurement process?
If so, you’ll understand the importance of understanding the language of your procurement metrics for better strategic advantage.
Apart from simply achieving cost savings for your company, you must learn how to maximize the value of the procurement process.
To navigate this path better, being critical to a comprehensive set of metrics known as Key Performance Indicators (KPIs) will help your company achieve better efficiency, cost-effectiveness, and sustainability in your procurement process.
In this blog, we’re diving into the world of Procurement KPIs and discuss 22 key metrics you need to examine to determine the efficiency of your procurement process. We’ll explore the art of measuring and improving your procurement process.
Whether you’re a seasoned procurement professional or just starting to explore the world of KPIs, this guide will empower you with the knowledge needed to make informed decisions and drive excellence in your procurement endeavors.
Procurement KPIs or key performance indicators refer to measurable values that track the performance of your organization’s procurement functions.
These are used to assess the efficiency, effectiveness, and cost-effectiveness of your procurement activities.
Procurement Key Performance Indicators (KPIs) are essential tools to ensure you evaluate the performance of your procurement teams and departments. These metrics play a vital role in monitoring the effectiveness of your company’s procurement management process, ultimately helping your company optimize your spending and align with your business objectives.
The purpose of procurement KPIs is to provide measurable indicators that reflect how well your procurement functions achieve your goals. By tracking and analyzing key metrics, your organization can gain valuable insights into your procurement performance, identifying areas for improvement.
Aside from that, it also helps you make data-driven decisions.
Procurement KPIs cover a wide range of measurements. These include:
We will discuss more about these in detail in the next sections.
Measuring the efficiency of your procurement process through tracking KPIs is important as it brings many benefits to your company.
One main benefit of measuring procurement KPI is its ability to align your procurement activities with the overall business objectives of your company.
These metrics allow your organization to measure the impact and contribution of procurement teams in achieving your company’s goals.
Aside from that, measuring procurement KPIs also drives accountability within your company, fosters a culture of continuous improvement, and provides actionable insights to help your team make informed decisions.
Measuring your procurement KPIs is very valuable. As a performance tool, it allows your organization to evaluate and monitor the efficiency of your procurement management process.
By optimizing and aligning your business objectives by simply tracking your KPIs, your company can maximize value and achieve sustainable growth.
Do you know that your procurement KPIs are divided into four categories? Let’s briefly discuss them individually before we dive into the comprehensive list of KPIs your company needs to track!
Cost savings KPIs measure the amount of money your procurement department has saved.
Your team can achieve this through various strategies, such as negotiating better prices with your suppliers, finding alternative suppliers, and even reducing your maverick spending.
Example of how this category of procurement KPI can be used:
Quality KPIs measure the quality of goods and services that you procure.
This includes the quality of the products and the quality of the supplier’s performance. Quality KPIs are very important because they significantly impact your bottom line.
For example, poor-quality products can lead to increased customer returns and warranty costs.
Example of how this category of procurement KPI can be used:
Delivery KPIs measure the timeliness and reliability of deliveries to your company. This is very important because late deliveries can disrupt production and lead to lost sales within your organization.
Your company can also use delivery KPIs to identify bottlenecks in the supply chain and make improvements.
Example of how this category of procurement KPI can be used:
Inventory KPIs measure the efficiency of your inventory management. This includes tracking inventory levels, forecasting demand, and optimizing order fulfillment.
Inventory KPIs are important because they help your organization reduce costs and improve your customer service.
Example of how this category of procurement KPI can be used:
Let’s dive deep into the procurement KPIs you need to track to identify the effectiveness of your company’s procurement process. We are going to discuss them by category.
Definition: Purchase price variance is the difference between the standard price and the actual price paid for a good or service.
Measurement: To measure purchase price variance, calculate the following:
(Actual price – standard price)/standard price
For example, if the standard price for a widget is $10 and you pay $12 for it, your purchase price variance would be 20%.
Definition: Procurement cost reduction is the amount of money a company saves on its procurement costs by negotiating better prices with suppliers, finding alternative suppliers, or reducing waste.
Measurement: To measure procurement cost reduction, calculate the following:
Procurement costs in the previous period – procurement costs in the current period
For example, if your procurement costs in the previous period were $100 million and your procurement costs in the current period are $90 million, your procurement cost reduction would be $10 million.
Definition: Procurement cost avoidance is the amount of money a company saves on its procurement costs by avoiding potential problems, such as late deliveries, quality issues, or supplier failures.
Measurement: Procurement cost avoidance is typically measured qualitatively, as it can be difficult to quantify the amount of money saved by avoiding a problem. However, companies can track metrics such as the number of late deliveries, quality defects, and supplier failures to identify areas where cost avoidance occurs.
Definition: Maverick spending is the unauthorized or unplanned spending on goods or services. This can occur when employees purchase items outside the company’s approved supplier network.
Measurement: To measure Maverick spend, companies can track the following metrics:
Definition: Spend under management is the percentage of a company’s procurement spend managed through its approved supplier network.
Measurement: To measure spend under management, calculate the following:
(Total procurement spend – maverick spend) / total procurement spend
For example, if your total procurement spend is $100 million and your maverick spend is $10 million, your spending under management would be 90%.
Definition: Procurement ROI is a company’s return on investment from its procurement activities. This can be calculated by dividing the net benefits of procurement activities by the costs of those activities.
Measurement: To measure procurement ROI, calculate the following:
(Net benefits of procurement activities – costs of procurement activities) / costs of procurement activities
The net benefits of procurement activities can be calculated by subtracting the costs of procurement activities from the savings generated by those activities. The costs of procurement activities can include the salaries of procurement staff, the cost of procurement software, and other expenses related to the procurement process.
Definition: Price competitiveness is the ability of a company to obtain goods and services at competitive prices. This can be measured by comparing a company’s prices to those other companies pay for the same goods and services.
Measurement: To measure price competitiveness, companies can track the following metrics:
8. Number of Suppliers
Definition: The number of suppliers is the total number of suppliers a company uses to purchase goods and services.
Measurement: To measure the number of suppliers, count the unique ones you purchased from in a given period.
Definition: Compliance rate is the percentage of suppliers that meet a company’s requirements. This can include requirements for quality, delivery, and pricing.
Measurement: To measure the compliance rate, calculate the following:
(Number of suppliers that meet requirements / total number of suppliers) * 100
For example, if you have 100 suppliers and 90 meet your requirements, your compliance rate would be 90%.
Definition: Supplier quality rating measures how well a supplier meets a company’s quality standards. This rating can be based on factors such as the number of defects, the timeliness of deliveries, and the supplier’s responsiveness to customer complaints.
Measurement: There are several different ways to measure supplier quality ratings. One common approach is to use a scoring system. Each supplier is assigned a score based on their performance on various quality criteria. The scores are then aggregated to produce a composite quality rating for each supplier.
Another approach to measuring supplier quality rating is to use a survey. Customers, suppliers, and other stakeholders can be surveyed to get their feedback on the supplier’s quality performance. The feedback can then create a quality rating for the supplier.
Definition: Supplier defect rate is the percentage of products or services received from a supplier that do not meet the company’s quality standards.
Measurement: To measure supplier defect rate, calculate the following:
(Number of defective products or services received / total number of products or services received) * 100
For example, if you receive 100 products from a supplier and 10 are defective, your supplier defect rate would be 10%.
Definition: Supplier diversity is the percentage of a company’s procurement spend awarded to diverse suppliers. Diverse suppliers can include businesses owned by women, minorities, veterans, and people with disabilities.
Measurement: To measure supplier diversity, calculate the following:
(Total procurement spend with diverse suppliers / total procurement spend) * 100
For example, if your total procurement spend is $100 million and you spend $20 million with diverse suppliers, your supplier diversity would be 20%.
Definition: Vendor rejection rate is the percentage of products or services received from a supplier that the company rejects due to quality issues. Vendor rejection costs are the costs associated with rejecting vendor products or services, such as shipping the products back to the supplier and finding alternative suppliers.
Measurement: To measure vendor rejection rate, calculate the following:
(Number of vendor products or services rejected / total number of vendor products or services received) * 100
Calculate the total cost of rejecting vendor products or services to measure vendor rejection costs. This can include the cost of shipping the products back to the supplier, the cost of finding alternative suppliers, and the cost of lost sales.
Definition: Purchase order cycle time is the time it takes for a purchase order to be placed, processed, and fulfilled. This includes the time it takes to create the purchase order, approve it, send it to the supplier, and receive the goods or services.
Measurement: To measure purchase order cycle time, calculate the following:
(Date goods or services received – date purchase order placed)
For example, if you place a purchase order on January 1st and receive the goods or services on January 10th, your purchase order cycle time would be 10 days.
Definition: Lead time is the total time it takes to complete an order, from when it is placed to when the goods or services are delivered. This includes the purchase order cycle time and the time it takes for the supplier to produce and deliver the goods or services.
Measurement: To measure lead time, calculate the following:
For example, if you place a purchase order on January 1st and receive the goods or services on January 10th, your lead time would be 10 days.
Definition: Emergency purchase ratio is the percentage of purchases made on an emergency basis. Emergency purchases are typically made when there is an unexpected shortage of goods or services.
Measurement: To measure the emergency purchase ratio, calculate the following:
(Number of emergency purchases/total number of purchases) * 100
For example, if you make 100 purchases in a year, 10 of them are emergency purchases, your emergency purchase ratio would be 10%.
Definition: Purchases in time and budget measure how well the procurement department can meet its delivery and budget targets.
Measurement: To measure purchases on time and budget, calculate the percentage of purchases made on time and within budget.
To calculate the percentage of purchases made on time, divide the number of purchases made on time by the total number of purchases and multiply by 100.
Definition: Training and development time is the time procurement employees spend on training and development activities. This can include formal training courses and informal learning activities such as job shadowing and mentoring.
Measurement: To measure training and development time, track each procurement employee’s spending on training and development activities. This can be done using a time tracking system or by asking employees to self-report their training and development time.
Definition: The inventory turnover ratio measures how quickly inventory is being sold. This is calculated by dividing the cost of goods sold by the average inventory level. A higher inventory turnover ratio indicates that inventory is sold more quickly and efficiently.
Measurement: To measure the inventory turnover ratio, calculate the following:
Cost of goods sold / average inventory level
For example, if your cost of goods sold is $100 million and your average inventory level is $20 million, your inventory turnover ratio would be 5.
Definition: Days of inventory on hand measure how long it takes to sell the current inventory level. This is calculated by dividing the average inventory level by the daily cost of goods sold. A higher day of inventory on hand indicates that the company has more inventory on hand than it needs.
Measurement: To measure days of inventory on hand, calculate the following:
Average inventory level / daily cost of goods sold
For example, if your average inventory level is $20 million and your daily cost of goods sold is $1 million, your inventory on hand would be 20 days.
Definition: Stockout rate is the percentage of orders that cannot be fulfilled because the company does not have the necessary inventory. A high stockout rate can lead to lost sales and customer dissatisfaction.
Measurement: To measure the stockout rate, calculate the following:
Number of orders that cannot be fulfilled due to stockouts / total number of orders) *100
For example, if you receive 100 orders and 10 cannot be fulfilled due to stockouts, your stockout rate would be 10%.
Definition: Fill rate is the percentage of orders fulfilled on time and in full. A high fill rate indicates that the company can meet customer demand.
Measurement: To measure the fill rate, calculate the following:
Number of orders fulfilled on time and in full/total number of orders) * 100
For example, if you receive 100 orders and 90 of them are fulfilled on time and in full, your fill rate would be 90%.
Measuring procurement KPIs is necessary for your organization. Aside from allowing you to track the performance of your procurement function, it helps you identify areas where you can improve.
By tracking your KPIs over time, you can see how your procurement function is performing and you can easily make adjustments as needed.
Here are some of the ways that you can measure your Procurement KPIs:
With ProcureDesk’s intuitive dashboard and comprehensive reporting capabilities, you’ll attain a transparent overview of your business’s expenses and cash flow, essential for effective financial management.
For example, you can promptly discern the details of your purchases and their origins while pinpointing the top spenders within your organization.
ProcureDesk provides access to over 30 detailed reports offering comprehensive transaction summaries.
This automation software simplifies the tracking of invoices without accompanying receipts, streamlining the follow-up process for your Accounts Payable team and ensuring confirmation of product delivery by your stakeholders.
Below is report generated in ProcureDesk:
When it comes to tracking procurement key performance indicators (KPIs) for your business, it’s crucial that you follow the best practices to ensure accurate and relevant insights.
Here are some of the best practices for tracking procurement KPIs within your company:
Set specific goals and targets. Before you start tracking your KPIs, you need to set specific goals for what you want to achieve. This will help you to focus your efforts and to track your progress over time. For example, you might set a goal to reduce procurement costs by 5% in the next year.
Use relevant and reliable data. The quality of your data will have a direct impact on the accuracy of your KPIs. It is important to collect data from relevant and reliable sources, such as purchase orders, invoices, and inventory records. You should also make sure that your data is complete and accurate.
Communicate results effectively. Once you have calculated your KPIs, it is important to communicate the results to key stakeholders, such as senior management, procurement staff, and suppliers. This will help to raise awareness of procurement performance and to build support for improvement initiatives.
Continuously improve KPIs. Tracking your KPIs over time will help you to identify trends and to identify areas where improvement is needed. You should develop a plan to improve your KPIs and to track your progress over time.
To choose the right procurement KPI, you need to consider your business goals and objectives.
What do you want to achieve with your procurement function? Once you know your goals, you can identify the KPIs that are most relevant to achieving those goals.
Some common KPIs for procurement clerks include:
The most important KPI to include in a procurement KPI dashboard is the one that is most relevant to your business goals and objectives.
However, a common KPI that is often included on procurement KPI dashboards is procurement cost reduction. This KPI measures how much money the procurement function has saved the company.
Procurement performance is the efficiency and effectiveness of the procurement function. It is measured by a variety of KPIs, such as procurement cost reduction, on-time delivery rate, and supplier quality rating.
Procurement benchmarking is the process of comparing your procurement performance to other companies in your industry. This can help you to identify areas where you can improve.
Some common KPIs for supplier management include:
Tracking and reporting Key Performance Indicators (KPIs) on a regular basis is crucial for the success of the procurement department in your company.
By monitoring these KPIs, your procurement teams can effectively evaluate your company’s performance, identify areas for improvement, and align your strategies with the overall business goals of your company.
Always remember that the importance of tracking procurement KPIs lies in the ability to provide valuable insights into the effectiveness and efficiency of your procurement processes, supplier performance, and cost reduction efforts.
This allows your procurement managers to measure and analyze your metrics such as purchase order cycle time, delivery time, cost avoidance, annual cost savings, and supplier defect rate.
Utilizing a cloud-based digital procurement solution for measuring KPIs can be helpful to your business as it provides you with real-time visibility into your procurement process, allowing timely report and analysis. A cloud-based solution also enables your organization to gain actionable insights, make informed decisions, and drive better procurement performance for the business. Thus, positively impacting your bottomline.
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