Setting KPIs for your procurement department

The procurement process is a critical business function, but how do you measure how effectively the process is managed in your business? Setting KPIs for your procurement department can help to demystify their performance and deliver insights into where improvements can be made.

The procurement process is a critical business function, but how do you measure how effectively the process is managed in your business? Setting KPIs for your procurement department can help to demystify their performance and deliver insights into where improvements can be made.

The procurement team plays an integral part in many businesses, managing the purchase of goods and services from vendors. The procurement process that they oversee includes sourcing, selecting and negotiating with vendors, creating purchase orders and tracking the receipt of goods.

Improving the procurement process can result in greater operational efficiency and cost savings. But before you can achieve improvements, you first need to identify the existing challenges and pinpoint any areas where improvements are needed. And that means monitoring performance against pre-set procurement key performance indicators (KPIs) and procurement metrics. These may include KPIs for measuring the performance of suppliers and the procurement team, as well as the organization as a whole.

So which procurement metrics and KPIs should you measure? And how can they help your procurement team operate more effectively? The following 10 procurement KPIs can help you measure the effectiveness of your procurement process and identify any areas where action is needed:

1. Compliance rate
2. Supplier defect rate
3. Supplier lead time
4. Number of emergency purchases
5. Purchase order cycle time
6. Supplier availability
7. Cost per invoice
8. E-invoices as a percentage of the total
9. Spend under management
10. Procurement ROI

1. Compliance rate

If suppliers do not comply with the agreed terms of your contract around issues such as delivery times and the price paid for goods, inefficiencies can arise and costs can creep up. The compliance rate can be measured by tracking a number of different KPIs.

Metrics:

• Invoice dispute rates
• Variance in price quoted and price paid for goods
• Accuracy in terms of the quantity of goods delivered.

2. Supplier defect rate

The goods and services you receive should meet your expected quality levels – but don’t take it for granted that standards will always be met. Defect rates should be measured for individual suppliers so that any issues around reliability or performance can be identified and factored in when sourcing goods and services.

Metric:

• Rate of defects in delivered goods

3. Supplier lead time

Long lead times can have an adverse effect on the efficiency of your business – so find out how long it takes your suppliers to complete an order, on average. If particular suppliers consistently fall short of projected lead times, action may be needed. This is especially the case if lengthening lead times start to affect your own ability to meet demand.

Metric:

• Time taken to ship an order once the order has been received

4. Number of emergency purchases

Emergency purchases are often a necessary last resort – but too many ad-hoc requests can result in higher procurement costs, while reducing the efficiency of your business. And there’s also a risk that product shortages will result in difficulties when sourcing goods at short notice. Tracking how many emergency purchases you make will help you to plan more effectively in future and keep emergency purchases, and the costs incurred through them, to a minimum.

Metric:

• Ratio of emergency purchases to total number of purchases

5. Purchase order cycle time

The purchase order cycle encompasses the time taken between submitting a purchase requisition and sending a purchase order to a supplier or vendor. The cycle time can range from hours to days – so it’s important to understand how your company performs and whether there is room for improvement. And that means using the right KPI to measure how long your PO cycle time is.

Metric:

• Average number of days taken for purchase orders to go through the purchase order cycle

6. Supplier availability

When it comes to sourcing vendors, it’s useful to know which of your suppliers are the most reliable in a pinch, and can therefore be called upon to respond to emergency purchasing demands when needed. You can find out by using the right KPI to keep track of supplier availability, ensuring that when you’re next in dire need, you’ve got the right supplier to reach out to.

Metric:

• Ratio of the number of times a supplier has catered to an emergency purchase request, compared to the total number of requests

7. Cost per invoice

The cost of processing invoices can be higher than you think, once you factor in things like labor costs, infrastructure costs and transaction fees – particularly if you are using manual processes. And some types of invoices cost more to process than others. Measuring the cost per invoice for different types of invoice can help you identify which are the most cost efficient – information which you can use to drive cost savings in your AP department.

Metric:

• Total costs divided by the number of invoices paid

8. E-invoices as a percentage of the total

Electronic invoices can generally be processed more quickly and cheaply than their paper equivalents, cutting out a lot of required manual input and reaping the benefits of automation. Tracking the percentage of invoices that you process electronically can help you identify whether there is room for improvement by encouraging more suppliers to onboard to your e-invoicing program.

Metric:

• Percentage of invoices sent electronically

9. Spend under management

Purchases that are managed by procurement are often more cost effective than ad hoc purchases, as they take advantage of volume discounts that have been achieved through negotiation. But inevitably some purchases will be maverick spend – in other words, spend that takes place outside approved contracts and processes. Measuring spend under management will help you find out if you’re missing out on possible cost saving opportunities by allowing for a more maverick spend than is ideal.

Metric:

• Percentage of total company spend that falls under procurement department management (total spend/managed spend x 100)

10. Procurement ROI

How effective is your procurement process at creating cost savings, and what is the return on investment into procurement? Tracking procurement ROI as a macro-metric can help you to get valuable insights into the overall performance of the procurement department at generating returns, but it should be used in conjunction with other procurement metrics.

Metric:

• Annual savings generated through procurement/annual procurement costs

Meet your KPIs with better supply chain management

The key performance indicators listed above can help you measure the performance of your procurement team and identify areas where savings and efficiencies can be achieved. And when it comes to driving improvements in procurement, it’s important to have the right technology in place.

Taulia’s supply chain software can help you boost operational efficiency and internal compliance, generate savings, and streamline the supply chain – thereby improving some important procurement KPIs. For example, our Invoice Automation solution allows you to receive electronic invoices quickly and effectively from your suppliers, enabling you to automate manual processes and reduce errors, as well as taking the opportunity to capture early payment discounts.

In addition, our Supplier Management software provides a streamlined way of communicating with suppliers, including sending updates on purchase orders, invoices and payments. And the self-service functionality means your suppliers can keep their own information fully up-to-date.

Contact us to learn more about how making use of Taulia solutions can help you work towards tracking and improving your procurement KPIs.