Procurement KPIs – An Essential Part of the Procurement Management Toolkit

The procurement process is no longer the simple source-buy-pay cycle, it has grown into a full-fledged business function that plays an important part in the business’s growth strategy. The procurement manager has his task cut out – he needs to monitor, measure and manage the performance of his team. Procurement metrics are the most effective way to measure the performance of the procurement team. Procurement KPIs are essential to evaluate and measure the performance of the procurement process.

KPIs

The Procurement Process at a Glance

The procurement process encompasses all the steps identified and followed by a business to source and obtain goods or services. The steps in the procurement process vary in every business, for some, it is a simple purchase process, for others, all the steps leading to purchase are part of the procurement process. The steps in the procurement process are based on the following factors:

  • Business operating model
  • Size of the business
  • Location of business
  • Financial budget
  • Compliance management
  • Organizational structure

The profit margins of the company and quality of services and goods depend on the effectiveness and efficiency of the procurement process. Identifying the need is the first step in the procurement process. Once the need is identified, finding the right vendor is the next step. Once a vendor is identified, the purchase order is prepared with all the specifications and terms and conditions. Upon receiving the purchase order, the vendor starts processing the order. Once the procurement team receives delivery of goods and services, they either accept or reject the order after due inspection. If the order is accepted by the team, the next step would be the payment of the invoice. Documentation of all procurement steps is a must for auditing and compliance purposes. The purchase requisition, purchase order, and vendor invoice are the main documents/receipts in the procurement lifecycle.

Need for Procurement KPIs

Key performance indicators (KPI) are important metrics that measure specific aspects of performance. KPIs enable project teams to monitor and share progress in a lucid and objective manner. Procurement KPIs are more granular and specific goals that are easy to track on a monthly or daily basis. Key performance indicators and key result areas are often mistaken to mean the same thing. Key result areas (KRAs) refer to general areas of outcomes or outputs for which a process or role is responsible. An individual or a group is responsible for outcomes of key result areas. The key result areas of the purchasing department help employees align their roles with the overall organizational goal. Modern businesses want the procurement function to deliver value beyond cost savings. Procurement managers are looking at ways to make the procurement function more sustainable and streamlined.

“If you cannot measure it, you cannot improve it” – Lord Kelvin.

Process improvements can be done only when you can measure the outcomes. Key performance indicators help procurement managers make data-driven process improvement decisions. Procurement and purchasing department metrics or KPIs enable procurement managers to monitor, manage and improve process performance. Procurement performance indicators help organizations to optimize and regulate their purchase expenses, quality, cost, and time.

Purchasing performance indicators can be used for analyzing data based on performance objectives and set actionable performance improvement goals. Purchasing KPI may be created in conjunction with supplier metrics in order to measure the performance elements of the procurement process. Procurement KPIs are essential elements in the performance management toolkit of procurement managers. Here is why you need procurement KPIs:

  • Evaluate and monitor the efficiency of the organization’s procurement management.
  • Optimize and streamline organizational spending, time, quantity, and sourcing of goods or services.
  • Enable procurement managers to make data-driven process improvements.
  • Align procurement process outcomes with the overall organizational goal and strategy.
  • Empowers organizations to decide on process improvements and competitive strategy.

List of Important Procurement KPIs

Procurement leaders look to improve their procurement process bank on an array of procurement metrics that help them, monitor, evaluate, manage, and improve the procurement function. What is the procurement key performance indicator that matters most? Procurement managers decide on the KPI to track based on the business type, size, and operations.

Having procurement management software can provide various KPI data on a dashboard. Key performance indicators for purchasing and supply, supplier performance indicators, and sourcing KPIs can be displayed on a dashboard.

Here is a list of procurement KPIs and metrics that are used to monitor the performance of the procurement function:

1) Number of Suppliers – Helps track the dependency level on suppliers

The procurement team of a business may have a single or multiple suppliers for a particular item. Instead of depending on a single supplier, it is better to have multiple vendor options for goods and services. This brings down the dependency on a single supplier. The supplier KPI keeps track of the number of suppliers the company deals with. Relying on few select vendors and not diversifying sourcing creates a risk of dependency and last-minute cancellations by a vendor. Having too many suppliers is also not profitable as the possibility of discounts is reduced. Suppliers may be classified as contracted and unlisted vendors. Businesses enter into a contract with the former type of suppliers as they comply with their terms and conditions. Unlisted vendors are those that do not agree to terms and conditions. Further, contracted suppliers may also be rated based on quality, discounts, and reliability. While measuring the supplier KPI, other metrics like defect rate of suppliers and quantity discounts they provide must also be considered.

2) Compliance Rate – Verifies if suppliers meet compliance requirements

Compliance rate KPI helps assess supplier’s compliance with business requirements. The entire procurement function is built on the basic agreement between the supplier and the company (buyer). This agreement covers terms like delivery time, exclusive discount offers, maximum reaction time in case of delays or issues, payment mode, etc. A drop in the compliance rate KPI results in an increase in indirect procurement or maverick spending.

The compliance rate KPI provides insights into supplier relationships and helps save costs through negotiations with suppliers. The metrics that contribute to this KPI are the ratio of disputed invoices to total invoices for that supplier, and the difference between the price paid and the price quoted. Engaging with Certified suppliers improves the compliance metric significantly since they have a better understanding of processes and work methodologies.

For a mid-size company, an overall compliance rate of 50% is a reasonable purchasing KPI target.

3) Supplier Quality Rating – Evaluate the quality of suppliers

The supplier quality KPI helps evaluate the quality of suppliers. This is one of the supplier KPI metrics that are critical for evaluating supplier performance management. It helps assess present and future supplier relationships. Suppliers that repeatedly deliver sub-standard goods or services have their quality rating lowered or corrective measures are implemented until quality issues are resolved. Other metrics like supplier availability also need to be considered for determining the supplier performance KPI. Supply of stock from suppliers whose availability is low cannot be relied upon. Businesses can suffer due to unreliable supplier availability.

The business needs to constantly monitor supplier quality KPI and evaluate the damaged or returned goods, defect rate, and supplier availability, in order to negotiate future contracts and agreements. It is important to back the evaluation of suppliers with data and analytics, and set clear goals, and monitor the supplier metrics in detail.

4) Supplier Availability – A measure of supplier’s ability to meet demand

This procurement KPI measures the supplier’s response to urgent requirements. This KPI helps businesses determine the reliability that can be placed on the vendor. Supplier availability is measured by the ratio between the number of times items were available on the vendor’s side to the total number of orders placed with the vendor. In the era of the Internet, the lines between various purchase channels are blurred. The retail experience is where the online purchase, mobile-commerce, and in-store purchase, merge seamlessly. In order to ensure an uninterrupted supply of goods and services, it is important to manage suppliers across various channels efficiently.

Businesses can take decisions on the reliability of a supplier by continuously monitoring the supplier availability metric. Ideally, supplier availability of 90% and above is a sign of greater efficiency and functioning of the supply chain.

Supplier availability KPI = number of times items were available with vendor/total number of orders placed with the vendor

5) Supplier Defect Rate – Helps evaluate the quality of individual suppliers

The supplier defect rate KPI is useful in evaluating the individual quality of the supplier. The final quality of the product can be closely evaluated by the purchasing department using this KPI. This metric is measured as a ratio of the number of substandard products to the total number of units inspected. The measure of supplier defect rate is usually in terms of defects per million. The procurement department can measure the supplier defect rate and break it down based on the defect type to gain actionable insights into vendor performance.

The percentage of products received from the vendors that fail to meet the quality and compliance requirements of the company can be calculated using the supplier defect rate. In industries such as aerospace, automotive, and defense where the stakes are high and multi-tiered supplier bases are maintained, the monitoring of supplier defect rate is crucial. Continuous tracking of the supplier defect rate and breaking it down into defect types provides key insights into supplier performance and reliability.

Supplier defect rate KPI=total number of substandard products/total number of units inspected

6) Purchase Order Cycle Time – Helps identify whom to address urgent orders to

The purchase order cycle time is the time from when a purchase requisition is submitted to when it is transferred to a supplier or contractor. The entire purchase order cycle is covered by this KPI. Order creation, approval, delivery, invoice generation, and payment are the steps in the purchase order cycle. The PO cycle time may vary from hours to days. The suppliers that respond to urgent orders can be identified from the value of this metric. Depending on the value of the cycle time, suppliers may be divided into various categories.

For example, suppliers with a PO cycle time of 4 days or less may be categorized as short, cycle time ranging from 5 to 8 days may be categorized as a medium, and cycle time above 8 days may be categorized as long.

An urgent order may be given to a vendor with a short PO cycle time. The overall cost and productivity of the procurement function and staff productivity can be improved by reducing the PO cycle time.

7) Vendor Rejection Rate and Costs – Helps evaluate internal quality management strategies

Vendor performance KPIs like the rejection rate and costs offer actionable insights into the internal quality management strategy. Continuous tracking of these KPIs is essential for sustainable business growth. Correlating the vendor rejection and vendor cost metrics helps in analyzing the cause of an increase in both measures and the possibility of seeking a replacement for damaged goods within a short duration.

A drastic increase in either of these two metrics calls for immediate action from the buyer. Seamless communication between the buyer and the supplier is essential to avoid bottlenecks and negotiate solutions to ensure healthy vendor relationships. Tracking the vendor rejection and cost metrics on a regular basis aids in avoiding unpleasant lawsuits for damages or guarantee claims. The cause of issues and ways to avoid them in the future can be worked out when these KPIs are monitored.

8) Lead Time – Gauge the total time to fulfill an order

The total time required to fulfill an order is referred to as lead time. This purchasing metric is a measure of the time between the initiation of a purchase action to the receiving the production model into the supply system.

  • Purchase of the production model is the end result of the initiation of the purchase of the goods/services.
  • Lead time is a measure of the latency between initiation and completion (execution) of the process.
  • Vendor or supplier lead time is the time between receiving a purchase order to the time when the order is shipped.
  • Lead time must not be confused with the PO cycle time as they both refer to different time frames.
  • Lead time starts when the request is made and ends after final delivery and testing, while PO cycle time starts at request initiation and ends when the order is confirmed.
  • Lead time is the sum of the production lead time and the administrative lead time.

Buyers must set targets for the expected lead time and monitor whether suppliers stick to those times. Repeated failure to meet the targeted lead time requires corrective action. Small lead times are ideal, provided there is no compromise on quality.

Supplier lead time = Delivery time – PO acceptance time

9) Emergency Purchase Ratio – Helps track number of emergency purchases

It is normal for a business to have ad hoc requests but having a large number of unplanned purchases reflects poorly on the procurement strategy. Emergency purchasing ratio is a KPI that throws light on unplanned orders. Emergency purchases are usually done when the business forecasts a shortage of products or services.

Emergency purchases are usually done at higher purchase rates, so the lower the emergency purchase rate, the better is the business efficiency.

Having a low emergency purchase ratio helps businesses:

  • Save costs
  • Streamline procurement plans
  • Ensure continuity (availability) of goods
  • Minimize supply risks

This metric is a reflection of the efficacy of procurement strategy and a guide for planning future strategies. Efforts to keep the emergency purchase ratio low will help businesses avoid process bottlenecks and product shortages within the product portfolio.

Emergency purchase ratio = the number of emergency purchases/total number of purchases over a fixed period of time.

10) Purchases in Budget and Time – Helps monitor the purchasing time and cost(budget)

The procurement manager needs to be always updated on the purchasing time and budgets. Ensuring that the purchases are completed within the stipulated time and that the expense is within the budget is critical for the purchasing department. Tracking this KPI helps procurement managers to identify gaps in the procurement pipeline and resource utilization.

Identifying the percentage of purchases within the budget and time can be accomplished by tracking this KPI. A large percentage of purchases outside the projected budget and time is a cause of concern for the procurement head. Analysis of why and how the purchasing budget KPIs were not met helps the manager streamline or revise the purchase plan.

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11) Cost of the Purchase Order – Monitor and control the internal cost for each purchase

The definition and application of the cost of purchase order KPI may vary in every business. A broad definition of the cost of the purchase order is the average cost of purchasing an order, from purchase, creation to invoice closure. Practically speaking, the measurement of this KPI involves the tracking of several variables.

Each business comes up with a different list of variables that determine the cost of the purchase order. Some may consider direct and indirect costs, while others may only consider the direct costs and the time each order takes. It is important to understand the essence of tracking the cost of purchase order metric, which is to improve the efficiency of procuring to pay lifecycle and keep the errors and costs to a minimum. Once the intent of measuring this KPI is understood, businesses can decide on the variables that should be considered to measure it.

12) Procurement Cost Reduction – Helps streamline the tangible cost savings

The procurement cost reduction metric is an example of the procurement key performance indicators that focus on the cost of the procurement function. The procurement cost reduction KPI aids procurement managers to streamline the tangible cost savings of the procurement function. This KPI measures the % cost savings on every order through price negotiations. The cost savings done by negotiations and discounts over the years shows the efficacy of the cost management measures followed by the procurement department.

Procurement cost reduction can be measured by comparing the old costs with the new (revised) costs for the same goods or services. A clearer picture of the cost reduction can be obtained by breaking it down into various supplier categories and tracking the ones with the highest savings. This KPI helps the procurement department to streamline and optimize the supplier lifecycle, educate and train staff on cost-saving measures, and increase efficiency by implementing supply chain analytics. The top management relies on cost reduction metrics for building a long-term cost management strategy.

13) Procurement Cost Avoidance – Helps avoid extraneous future costs

This metric aids the procurement managers in taking action to avoid potential extra costs in the future. Procurement cost avoidance is often referred to as “soft saving” KPI as opposed to the “hard savings” KPI like the procurement cost reduction. This KPI will not appear directly on the cost management strategy in a quantifiable manner, but can still create a positive impact on cost savings.

Top management usually does not pay attention to this metric as it does not appear on the income statement of the organization. Strategic expenses like new investments or technologies that have no basis for comparison can be streamlined using this metric. The best way to use this metric is to develop a strategy to map cost avoidance internally and combine it with procurement cost reduction metrics to avoid extraneous future costs. An effective cost avoidance strategy would be to enter into long-term contracts that protect the business from future price fluctuations.

14) Spend Under Management – Helps track and optimize expenses

This purchasing KPI can be categorized as a management KPI. The strategically managed spend including established rates with suppliers and control systems that ensure the use of negotiated prices is covered by spend under management KPI. Including the above spend categories while evaluating this metric enables businesses to realize huge unrealized cost savings.

Management needs to regularly analyze spend, evaluate suppliers, and review contracts in order to identify strategic and operational savings. Consolidating purchases and negotiating for volume discounts can result in huge savings.

15) Procurement ROI – Evaluate the profitability of investments

Procurement ROI is one of the most important metrics that determine the cost-effectiveness and profitability of the procurement investment. This metric is valuable for internal analysis of the procurement function. Although an important KPI, procurement ROI alone cannot be considered to get the complete picture of the procurement function performance. It should be correlated with other KPIs to get the complete picture of the performance. This metric does not take the cost avoidance metric into consideration. Setting the purchasing ROI target 10x the internal investments is a good procurement strategy.

Procurement ROI = Annual cost savings/annual procurement cost

The list of procurement key performance indicators that every business uses to evaluate performance may vary with the size and type of business. Tracking the procure-to-pay (P2P) offers great potential for value addition and cost savings. The P2P cycle covers tasks from purchasing raw materials to obtaining goods/services like custodial services, office supplies, and utilities. Tracking p2p KPIs enables efficiency improvement and cost savings in procurement and accounts payable processes.

Categorization of Procurement KPIs

As mentioned before, the KPIs tracked by a business varies with the type and size of the business and the overall business strategy. Businesses need to choose baseline KPIs that enable effective evaluation of the performance of the procurement function. The chosen procurement KPIs need to be relevant, realistic and enable efficient management of supplier, staff, and organizational performance.

Given below is the categorization of procurement KPIs:

Supplier KPIs Staff KPIs Organizational KPIs
Number of suppliers Spend-per employee Spend under management
Delivery time of suppliers Cost savings or avoidance Inventory accuracy
Supplier Spend Spend under contract The ratio of spending to sales revenue
Quality performance rating Purchase order cycle time Inventory turnover
Supply chain risk Training and development time Procurement ROI
Compliance rate Lead time
Supplier quality rating Emergency purchase ratio
Supplier availability Purchases in time and budget
Supplier defect rate Cost of purchase order
Supplier rejection rate and cost

Apart from the above categories, KPIs may be assigned for other procurement processes like tendering, sourcing, inspection, etc. Key performance indicators for tendering may be the average time to complete tendering or bidding, the average cost of a tender or bid, the percentage of bids that comply with policies, and the difference in the bid price and actual price. Based on the procurement plan and overall business strategy, the key performance indicators may be chosen to assess the performance of the procurement function.

Procurement Workflow Automation and KPIs

Key performance indicators are useful tools in evaluating the efficiency of business processes. Repetitive and redundant tasks in a business process can affect productivity adversely. A streamlined and optimized business process translates to improved business efficiency and performance. Automation of key business process workflows is a great way to improve process efficiency and productivity. Extraneous steps are removed through workflow automation, which translates to cost and time savings. Workflow automation also offers a centralized dashboard that helps track procurement KPIs in real-time. Management gets a bird’s eye view of all the procurement tasks from the dashboard of a procurement automation software.

A cloud-based procurement software enables effortless tracking of all procurement KPIs from a centralized dashboard. Automation software provides dedicated tools that streamline procurement functions like purchase request management, purchase order management, supplier management, compliance management, and invoice and contract management. Performance data from all these processes is gathered, stored, and analyzed with minimal human intervention.

Cflow is a powerful cloud workflow automation platform that offers significant advantages in streamlining the procurement function and improving procurement performance. Here are the key advantages of using Cflow to track and improve the procurement function:

  • Efficient tracking of key procurement KPIs
  • Elimination of process redundancy
  • Improved compliance management
  • Enhance supplier relationship management
  • Improved visibility of the procurement process
  • Proactive follow-up of procurement orders and invoice approval through automated reminders and notifications
  • Creation of custom reports that provide deep insights into performance metrics

Conclusion

Understanding the importance of tracking procurement KPIs is the first step to improving the efficiency of the procurement function. Procurement KPIs provide key data insights into the performance and efficiency of the procurement function. Tracking key procurement performance indicators helps procurement managers make informed decisions on improving the procurement strategy. An intuitive, no-code workflow automation software like Cflow is a powerful tool for effective and efficient procurement management. According to a market research report, the global Procurement as a Service (PaaS) market is expected to grow at a CAGR of 6.4% between 2020 and 2027 to reach a whopping value of 4,471 million USD by 2027. Give your procurement business the advantage of process workflow automation by signing up for Cflow.

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