Procurement KPIs to Track-Analyze-Improve Performance
Importance of Procurement Metrics
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.
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, and 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:
The company’s profit margins 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 the 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 (KPIs) 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 setting actionable performance improvement goals. Purchasing KPIs 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:
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.
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:
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, and realistic and enable efficient management of suppliers, staff, and organizational performance.
Given below is the categorization of procurement KPIs:
|Number of suppliers
|Spend under management
|Delivery time of suppliers
|Cost savings or avoidance
|Spend under contract
|The ratio of spending to sales revenue
|Quality performance rating
|Purchase order cycle time
|Supply chain risk
|Training and development time
|Supplier quality rating
|Emergency purchase ratio
|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 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.
Here are the key advantages of using Cflow to track and improve the procurement function:
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. Intuitive, no-code BPM tools like Cflow is a powerful workflow management system tools 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.