What makes KPIs so vital to Procurement? Just because the purchase order is placed with the supplier, our work as procurement professionals is not done. At this stage of the procurement cycle (stage 10), our work should be focusing on the management of the contract to ensure that the supplier is delivering as per our expectations. To understand in a fair and effective manner whether a supplier is performing to the required standard we can create and monitor KPIs.
What Are KPIs?
KPIs are key performance indicators and are a way in which procurement professionals can understand and evaluate a supplier’s ability to meet their contractual obligations. They are concise statements that are written into a contract as express terms which are regularly monitored and reported on.
KPIs are popularly related to areas such as:
- On time delivery
- Amount of rejects
- Cost reduction
- Ethical conduct
- Sustainable approaches
- Lead times
Figure 1: Tape Measure Graphic – Procurement KPIs
While KPIs can be written to measure nearly any aspect of supplier performance, they must be relevant to the contract and add value to the business. This means understanding what’s important to the organisation, what information is useful and how it can be gathered consistently.
Figure 2: KPI Steps and Evaluation Process
How to Structure KPIs
A practical tool for creating meaningful KPIs is the SMART framework, first introduced by George T. Doran (1981). If a KPI meets all these five elements it provides valuable data to the organisation.
Figure 3: The SMART framework (Doran, 1981).
Example: Good vs. Bad KPIs
Bad KPI Example (Not SMART): Supplier to deliver when goods are needed
Good KPI Example (SMART): Supplier to deliver goods detailed on the purchase order by 0800 on Tuesday morning for the duration of the agreement.
If an organisation set the first KPI that is not SMART the supplier has no guidance as to exactly what is required of them. As such if the buying organisation wanted to reprimand the supplier for late deliveries they would not have an tangible evidence. The second KPI gives the supplier the exact details of what is required and as such allows the organisation to fairly manage the supplier’s performance.
Aligning KPIs With Strategy
Looking at KPIs in a more strategic manner, it is important to try and relate them to the organisation’s strategy, vision and mission. KPI’s can help a supplier align more closely to a business. If, for example, a business is looking to become carbon neutral, KPIs could be set for the supplier to provide goods in recyclable or reusable packaging.
Figure 4: KPI Hourglass
The benefits of KPIs are vast and include the fact that it gives the procurement team early indication of any potential issues. If a supplier that was once performing well in relation to delivering excellent quality suddenly starts to present with many defects or lower quality items, this would raise concern. The results of the KPI would flag up reduced performance and allow the buyer to address this issue. The issue could be a minor blip in production but it could be more serious. Is the supplier providing inferior products because they have not got enough money to pay the staff or to buy the required raw materials? Early indication in this situation would be key to risk management.
KPIs also motivate suppliers. If there is a target set most suppliers want to achieve it to ensure that the contract will be renewed and/or new business will be won.
It is true, that creating and managing KPIs takes time and a level of skill, but the benefits are vast and the opportunity to identity risk early in relation to quality or continuity of supply far outweighs the extra time taken to set the process up.
Wrap Up
Do you want to know more about KPIs and supply chains? Then, why not consider studying for a CIPS professional qualification. For more information on our range of CIPS courses and how to get your free trial, visit our website.