12 essential procurement KPIs

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.

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 strategies operate more effectively? The following 12 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. Price competitiveness
11. Supplier base risks
12. Procurement ROI

1. Compliance rate

If suppliers don’t comply with the agreed terms of your contract around issues such as delivery times and the price paid for goods, inefficiencies can arise and procurement costs can creep up. 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 procuring goods and services.

Metric:

• Rate of defects in delivered goods

3. Supplier lead time

Long procurement 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 customer demand.

Metric:

• Average 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, 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.

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 procurement 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’re using manual processes. And some types of invoices cost more to process than others.

Measuring the cost of processing each invoice you receive, and categorizing the data by invoice type, can help you identify which are the most cost efficient – information which you can use to drive cost savings in your accounts payable department.

Metric:

• Total invoice processing costs divided by the number of invoices paid

8. Electronic invoices as a percentage of the total

Electronic invoices (or e-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.

Metric:

• Percentage of invoices sent electronically

9. Spend under management

Purchases that are managed end-to-end by the procurement department 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. Price competitiveness

Generally speaking, the lower the competition levels in your supplier base, the more likely you are to be spending more than you need to on procurement or missing out on higher-quality goods for the same price.

Measuring your suppliers’ price competitiveness by comparing the price you’re paying them for certain goods against the average market price can help you to identify areas where you’re not getting the most from your spend.

Metric:

• Percentage of orders that exceed the average market price

11. Supplier base risks

Supplier risks take lots of forms. Some are posed by individual suppliers based on their operational practices or vulnerability to external supply chain risks. Others are created by the overall makeup of your supplier base, such as only having one choice of supplier for an absolutely essential raw material you use in production.

A proper supplier risk assessment process, using supplier risk KPIs to measure adherence to standards, can help you to identify both types.

Metric:

• Percentage of suppliers that fail your standard supplier risk assessment
• Percentage of single-source suppliers for key goods or materials

12. 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.

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