The value of measuring the performance of external suppliers, distributors etc. is well known. Understanding current performance, comparisons over time and using data to better understand areas for improving performance of procurement are some of the key 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.
Improving Performance in Procurement Through Establishing KPIs
Key performance indicators (KPIs) can be used to analyse data based on performance objectives and set actionable goals for improvement. KPIs can be developed in conjunction with suppliers as well as others, and can be 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 assessed easily, in terms of the availability of the data as well as the data itself being objective and beyond dispute of either party. The KPIs used will differ from organisation to organisation, but the following are some of the commonly used indicators to help to measure improving performance in procurement.
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, T’s & C’s, 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 for improving performance of 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 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 CIPS courses we offer and for your two-week free trial, visit our website or contact us.