Improving Performance In Procurement

The responsibilities of the procurement process span across several internal department (warehousing, logistics, sales and finance) as well as external organisations including suppliers, carriers and other third party support organisations. Some external organisation work can be monitored by checklists or other simple data collection and analysis activities.

The value of measuring the performance of external suppliers, distributors etc. is well known; understanding current performance, comparisons of performance over time and using data to better understand areas for performance improvement are benefits of developing as assessing KPIs. In addition to the performance of individual suppliers, the procurement process as a whole can be monitored to  assess the extent to which the end-to-end process is optimum in terms of time, quality and value for money..

Key performance indicators (KPIs) can be used to analyse data based on performance objectives and set actionable goals for improvement.  KPIs are SMART (specific, measurable, attainable, realistic and time based) criteria developed in conjunction with suppliers and others used to measure the essential elements of the process. These measures can be developed at any time, but are often agreed at the beginning of a contract. It is important to agree measures which can be assess easily, in terms of the availabiliyu of the data as well as the data itself being objective and beyond dispute of either party. The KPI’s used will differ from organisation to organisation, but the following are some of the commonly used indicators, based on quality and cost data.

KPIs for Quality

Defect Rate – This is used to measure the amount of product faults. Depending on the type of product manufactured and the volume at which it is manufactured, this KPI may be measured as faults per unit or defects per million.

Procurement Cycle Time – The length of turnover time between placing the purchase requisition and the purchase order being sent is typically classed as the procurement cycle time, including time taken to request quotes from several suppliers and choose a winning supplier for the job.

Delivery Schedule – This KPI evaluates the quoted delivery time compared to actual delivery time, how often the product/service is delivered earlier or later than promised and by what length of time it is early/late.  How the actual delivery time impacts your own product schedule can also be taken into account.

Compliance With Original Contract – Based on the negotiations agreed at contract signing stage, is the supplier keeping to agreements on pricing, Ts & Cs, delivery times, etc?

KPIs for Cost

Cost Savings – This KPI is typically used to measure the % cost saving on each order via negotiations.

Cost Avoidance – Entering into long term pricing contracts, for example, is one of the many measures that procurement professionals can take to reduce future costs as well as improve short term cost savings. If these measures are taken, the cost avoidance KPI can be used to measure the future cost savings.

Managed vs. Total Spend – This KPI compares the money spent on managed purchasing processes (with long term suppliers with who the company has a relationship) to the total amount spent by the company (minus staff costs) over a quarter. E.g. if £400,000 is the total spend and £300,000 of that was spent on managed procurement processes, then some of that £100,000 could have been saved if it were spent through managed procurement processes.

Procurement ROI (Return on Investment) – This KPI compares the purchasing department’s budget with cost savings they have made, therefore measuring the department’s cost effectiveness.  It’s a measure of the cost effectiveness of the department.

The procurement KPIs we have covered are just a generalisation of the common KPIs used across various sectors, and therefore not all will necessarily apply to your organisation. However, in measuring performance, the opportunities to celebrate the great work of suppliers as well as identifying opportunities to improve can be identified by procurement; this is a real example of how procurement professionals add value to their own businesses as well as their suppliers. Start simple; the data you gather will help you drive performance.

If you are interested in learning more about business needs in procurement and supply, including how KPIs are used to monitor performance, then you may be interested in the CIPS Diploma in Procurement and Supply. The qualification is accredited by the Chartered Institute of Marketing (CIPS) and is designed to equip an aspiring procurement professional with the skills and knowledge to perform in a junior role and progress in their procurement career. For more information about the procurement courses we offer, please call one of our friendly course advisors (0)1865 515 255 or email cipsenquiries@oxfordpeg.com.