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11 Essential Procurement KPIs You Can’t Ignore
In today’s business landscape, companies expect procurement teams to deliver value beyond mere cost savings. Consequently, procurement leaders are continuously seeking ways to enhance their procurement processes and promote sustainability. However, they are keen on making informed decisions backed by relevant data. Therefore, they track various purchasing metrics as Key Performance Indicators (KPIs).
Procurement key performance indicators (KPIs) are a common term in procurement discussions, yet they are not universally defined. What constitutes a KPI can vary significantly across businesses, leading to uncertainty among procurement leaders about which metrics truly matter.
To ensure effective decision-making and performance tracking, it’s essential to prioritize purchasing KPIs that are most relevant. This involves gaining a deeper understanding of purchasing metrics and examining the KPIs adopted by industry leaders.
Procurement key performance indicators (KPIs) are a common term in procurement discussions, yet they are not universally defined. What constitutes a KPI can vary significantly across businesses, leading to uncertainty among procurement leaders about which metrics truly matter.
To ensure effective decision-making and performance tracking, it’s essential to prioritize purchasing KPIs that are most relevant. This involves gaining a deeper understanding of purchasing metrics and examining the KPIs adopted by industry leaders.
What are procurement KPIs?
Procurement Key Performance Indicators (KPIs) serve as vital tools for assessing and monitoring the effectiveness of an organization’s procurement management. These metrics aid in optimizing and controlling expenditures, ensuring quality, managing time, and controlling costs.
Moreover, procurement KPIs enable businesses to align with their overarching process goals, procurement strategies, and broader business objectives.
Moreover, procurement KPIs enable businesses to align with their overarching process goals, procurement strategies, and broader business objectives.
Why measure the efficiency of your procurement process?
The adage “If you cannot measure it, you cannot improve it” remains as relevant as ever. Evaluating the efficiency of a procurement process is crucial, particularly in navigating the challenges of an economic downturn within the supply chain. One effective method to enhance procurement efficiency is through automation.
While cost savings are a primary objective of procurement performance, its scope extends beyond that. Through measuring the performance of procurement processes, organizations can address other significant questions, such as:
What areas require improvement?
How do we benchmark against other organizations?
Are we experiencing improvement or decline over time?
While cost savings are a primary objective of procurement performance, its scope extends beyond that. Through measuring the performance of procurement processes, organizations can address other significant questions, such as:
11 KPIs every procurement team should measure without fail
Selecting the right procurement KPIs requires alignment with your business goals and ease of tracking. As you draft your initial procurement KPIs, it may seem daunting. However, gaining a clearer understanding of their purpose can help identify KPIs that best suit your requirements.
Here are eleven procurement KPIs that organizations should monitor:
Compliance rate
Supplier defect rate
Accuracy of purchase orders and invoices
Rate of emergency purchases
Supplier lead time
Purchase order cycle time
Vendor availability
Cost per invoice and purchase order
Spend under management (SUM)
Procurement ROI and benefits
Price competitiveness
These procurement KPIs can be categorized into three main groups based on their purpose: ensuring quality, enhancing delivery, and achieving cost savings. It’s crucial to note that all three categories are interconnected, and focusing solely on one may negatively impact the others, ultimately diminishing process sustainability.
Here are eleven procurement KPIs that organizations should monitor:
These procurement KPIs can be categorized into three main groups based on their purpose: ensuring quality, enhancing delivery, and achieving cost savings. It’s crucial to note that all three categories are interconnected, and focusing solely on one may negatively impact the others, ultimately diminishing process sustainability.
1. Quality KPIs: Ensuring Quality
Compliance Rate
Contractual and policy compliance is essential for legal security. A decrease in compliance rates can lead to increased indirect and maverick spend. Implementing robust purchasing contracts with clearly defined penalties can improve compliance rates.
Metrics to track:Ratio of disputed invoices to total invoices
Total price variance between paid and quoted prices
Metrics to track:
Supplier Defect Rate
The supplier defect rate evaluates a supplier’s individual quality performance. Analyzing supplier defect rates and categorizing them based on defect types provides actionable insights into a supplier’s reliability. Supplier defect rates are typically measured in defects per million.
Supplier defect rate = Number of substandard products / Total number of units tested
Supplier defect rate = Number of substandard products / Total number of units tested
Purchase Order (PO) Accuracy
Poor PO accuracy can increase operating costs. Procurement KPIs should be measured across various supply categories and buyer segments. This metric helps businesses ensure that suppliers deliver the correct items at the right time.
Indicators to monitor:Ratio of products/services delivered outside the predefined service target
Percentage of erroneous deliveries compared to the total number of purchase orders within a specified period of time
Indicators to monitor:
2. Delivery KPIs: Improve delivery
Rate of emergency purchases
Emergency purchases refer to unplanned orders made to prevent product or service shortages. This metric is calculated by dividing the number of emergency purchases by the total number of purchases within a specific timeframe.
Reducing the frequency of emergency orders enables organizations to:
Save expenses
Enhance procurement strategies
Mitigate supply risks
Ensure operational continuity
Reducing the frequency of emergency orders enables organizations to:
Supplier lead time
Supplier lead time represents the duration from when a supplier receives an order to when the order is shipped, typically measured in days. It encompasses the time from confirming availability and placing an order to delivering the goods.
Supplier lead time = Delivery time (Goods and receipts delivery) – Order time (PO acceptance)
Supplier lead time = Delivery time (Goods and receipts delivery) – Order time (PO acceptance)
Purchase order cycle time
Purchase order cycle time is the duration, typically measured in hours or days, from the submission of a purchase requisition to the transmission of the order to a vendor or contractor. This KPI encompasses the entire end-to-end ordering process, constituting the entirety of the purchase order cycle.
Vendor availability
Vendor availability is a procurement metric used to gauge a vendor’s ability to fulfill emergency demands promptly. This KPI assists organizations in assessing the reliability of their vendors.
Vendor availability (%) is calculated as the ratio of the number of times items are available from a vendor to the total number of orders placed with that supplier.
3. Cost-Saving KPIs: Receive savings
Cost per invoice and purchase order side
The expenditure per invoice and purchase order can fluctuate between organizations, contingent upon the factors incorporated in the calculation. Organizations employing manual processes typically incur higher processing costs compared to those utilizing automation.
According to a recent APQC survey, organizations with limited or no automation typically spend a minimum of $10 per invoice.
According to a recent APQC survey, organizations with limited or no automation typically spend a minimum of $10 per invoice.
Spend under management
Spend under management refers to the portion of procurement expenditure that is regulated or overseen by management. As an organization’s spend under management increases, its capacity to optimize costs and forecast expenses also improves.
SUM = Total approved spend (i.e., direct, indirect, and service-related cost ) – Maverick spend
SUM = Total approved spend (i.e., direct, indirect, and service-related cost ) – Maverick spend
Procurement ROI
Procurement ROI assesses the profitability and cost-effectiveness of procurement investments. This metric is most appropriate for internal analysis.
Procurement ROI = Annual cost savings / Annual procurement cost
Procurement ROI = Annual cost savings / Annual procurement cost
Price competitiveness
Insufficient competition among vendors can result in a scenario where a small number of suppliers monopolize the market, potentially leading to a decline in quality over time. Therefore, it’s crucial to prioritize vendors who offer the buyer a significant competitive edge.
Price competitiveness can be evaluated by comparing the actual price paid with the market prices published on procurement intelligence platforms such as Beroe Inc.
Moreover, this approach empowers procurement leaders to generate tailored reports showcasing key metrics such as purchase order cycle time, emergency purchase rates, and annual procurement savings relative to annual procurement costs.
Price competitiveness can be evaluated by comparing the actual price paid with the market prices published on procurement intelligence platforms such as Beroe Inc.
Moreover, this approach empowers procurement leaders to generate tailored reports showcasing key metrics such as purchase order cycle time, emergency purchase rates, and annual procurement savings relative to annual procurement costs.
Using an eProcurement tool is the key to improve procurement performance
To enhance procurement performance, organizations should transition KPI measurements and tracking to digital platforms. Utilizing a cloud-based tool facilitates data collection, segregation, routing, retrieval, and other essential functions. This enables procurement staff to dedicate more time to analyzing the gathered data.
Using an E-procurement software offers a number of great benefits like:
Drastic reduction in process time
A steep rise in productivity
Increase in speed and efficiency
Radical gains in terms of compliance
Substantial cost savings
Significant reduction of risk
Enhanced visibility of the whole process
Using an E-procurement software offers a number of great benefits like:
Visualizing and tracking procurement KPIs using Zapro Procurement
With Zapro, organizations gain access to a comprehensive tool that manages procurement processes seamlessly throughout the entire procure-to-pay cycle. Being a cloud-based solution, it offers instant access to all procurement data, making it effortless to measure procurement KPIs.
Zapro Procurement provides dedicated tools for essential procurement functions such as purchase order and request management, invoice and contract management, and vendor management. All data from these processes are interconnected and easily accessible with context, ensuring 360-degree visibility for consistency and transparency across the entire process cycle, including core processes like vendor evaluation and performance ratings.
Tracking procurement KPIs is simplified with Zapro’s function-specific tools that efficiently collect, store, and analyze necessary information with minimal human effort. The collected data is then securely shared with all relevant parties with role-based access.
Furthermore, Zapro Procurement can automate reminders for procurement leaders and vendors to ensure processes stay on track.
Additionally, procurement leaders can leverage Zapro to generate custom reports showcasing key metrics such as purchase order cycle time, emergency purchase rates, and annual procurement savings relative to annual procurement costs.
Zapro Procurement provides dedicated tools for essential procurement functions such as purchase order and request management, invoice and contract management, and vendor management. All data from these processes are interconnected and easily accessible with context, ensuring 360-degree visibility for consistency and transparency across the entire process cycle, including core processes like vendor evaluation and performance ratings.
Tracking procurement KPIs is simplified with Zapro’s function-specific tools that efficiently collect, store, and analyze necessary information with minimal human effort. The collected data is then securely shared with all relevant parties with role-based access.
Furthermore, Zapro Procurement can automate reminders for procurement leaders and vendors to ensure processes stay on track.
Additionally, procurement leaders can leverage Zapro to generate custom reports showcasing key metrics such as purchase order cycle time, emergency purchase rates, and annual procurement savings relative to annual procurement costs.
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