As a kid, when you received your exam answer sheets back, the teacher mentioned your score along with highlighting all the sections which could be further improved.
If you remember correctly, there also used to be some extremely helpful teachers who took the time to mark the sections they especially liked and decorate them with a star. Why do you think they did that?
They did that to help you recognize your strengths and weaknesses. Only when you recognize academic areas which need improvement will you be able to work on them efficiently. An opportunity to look at your strengths further motivates you to continue working hard and strive for the best.
Believe it or not, procurement KPIs play the same role for a business as academic scores play for a student's intellectual and personal growth.
In today’s world, the market is highly competitive. Both as an established or growing business, you need to measure your performance and growth frequently and align them with your business goal and objectives.
If you are a new business owner struggling to set the right procurement KPIs for your business, you're at the right place. In this post, we will cover everything you need to know about procurement KPIs that will allow you to make smart and informed decisions.
Let's begin with the basics.
Before we deal with procurement KPIs, let's first understand what procurement means. Procurement refers to the act of obtaining services and purchasing goods for your business.
In business-related activities, the terms ‘sourcing’ and ‘purchasing’ are sometimes used interchangeably with procurement—there are some differences between them:
Purchasing means ordering goods and getting them delivered. While sourcing refers to contacting suppliers who then arrange the goods for you.
Procurement, on the other hand, combines the process of purchasing and sourcing.
Apart from purchasing and sourcing, some other activities are also added to the procurement process— like analyzing the procured service/product, reordering it, planning how to use it, etc.
Depending on the type of business, each business utilizes different types of procurement methods. The four major types of procurement methods are:
It includes goods like raw materials, computer software, etc, that are directly involved in the making of final product/service.
This refers to procuring goods that are important in running your business but are not directly related to making your final product—like office supplies, meeting scheduling software, etc.
All the intangible purchases made by the company/business are referred to as services procurement.
In the digitally advanced world, the service procurements of all businesses and companies have increased significantly. For instance, SEO management software, CRM technology, etc., fall under the service procurement category.
All the intangible purchases made by the company/business— like office desks and chairs, coffee machines, festival decoration items, etc., fall under the goods procurement category.
Usually, in a business or company, the procurement department is responsible for procuring the raw products and goods, which are then transformed into the final product/service.
This resultant product/service's success makes or breaks your business. so measuring its performance every now and then becomes imperative. This is where procurement KPIs come into play.
A procurement KPI, i.e., key performance indicator, monitors whether the activities your business is doing are sufficient to reach the goal you aimed for. It functions as a performance indicator determining whether your chosen business management strategy is working or not.
Key performance indicators can help you identify why some strategies are not working and what you can do to make them effective.
It is also important to keep in mind that performance metrics differ for each business.
For instance, the performance of a brick-and-mortar apparel store will be completely different from that of a CRM solution online business. Therefore, each business needs its own procurement KPIs, also referred to as metrics, to measure its success and performance.
As we mentioned earlier, one can only improve something after being able to measure it. The right KPIs can help you measure the effectiveness and efficiency of your procurement process.
For instance, the country's economic system took a huge hit after the COVID-19 crisis. Each business's supply chain demand was hugely disturbed.
Robust and regularly updated KPIs help businesses identify downtime and adjust the supply chain demand accordingly.
Without procurement KPIs in place, a business will fail to recognize the need to change, costing the business a great opportunity. While your competitors might identify the opportunity and take the upper hand.
Procurement KPIs also produce a lot of data, allowing the procurement department to make relevant data-driven decisions.
In the digital world, data is the new currency. If you crack the code of spending this currency efficiently, you can enhance your business in creative and innovative ways.
Some other benefits of measuring the efficiency of the procurement process through procurement KPIs are:
We would again like to stress the fact that each business has different procurement KPIs and metrics. Here's a list of the 10 most important and general KPIs. These will kickstart your journey of redefining your performance metrics.
Do not stop your search after going through these 10 KPIs. There are a lot of other performance metrics and indicators you can add to your personalized procurement system.
It is important to have trustworthy suppliers and distributors and foster a long-term relationship with them — but it is equally important to diversify and explore your options.
The competition in the market is tough, and trends come and go quickly. You need to identify which trends are to be adopted and which are to be discarded.
Now and then, try establishing a connection with a new supplier. You can start with some indirect procurement to test the quality of the products. This will help you offer your customers new trends while avoiding high dependency on your old suppliers and distributors.
Additionally, new suppliers, in the hope of fostering a long-term partnership with you, might be willing to offer attractive discounts and offers.
Under this KPI, you can monitor the time your supplier takes to ship and deliver the product after the purchase order has been processed. If the lead time is too long, it is directly eating up your operational costs.
You might not realize it at that moment, but when you review your data later, the costs will become more evident collectively
If the lead time is too long, simply look for switching your supplier or take any other relevant action.
It refers to the number of times you had to place an emergency order. This can be due to abrupt factors like shortage of items, lost products, wrong pricing, offers, etc.
This indicates that your procurement plans needs to be updated according to the supply and demand cycle.
This is one of the most important procurement KPIs as it allows you to keep cost management as your top priority. Whether your business is running in profit or not, cost control should always be on the list.
If you will constantly focus on cost saving and track it diligently, all your decisions will automatically align with cost control
For instance, you will ensure all the projects are meeting the deadlines, without situations arising demanding variable costs, etc.
Cost avoidance is also an extremely important part of cost-saving tracking and cost control management. Here as well, the aim is to avoid preventable spending.
For instance, if you run a restaurant spending too much on inventory storage, this can be easily reversed. You can change your purchasing schedule or look for alternative cheap storage options.
Cost avoidance requires careful planning and implementation. Sit with your past purchasing records and data to make more informed cost-avoidance decisions.
Spend Under Management, also known as SUM, refers to the percentage of procurement spending regulated by the procurement management department.
The higher the percentage of procurement spending, the higher the potential for cost optimization. This process requires keeping a close eye on all the spending and checking if they are required or not.
While checking, it is important to take into consideration all the costs like direct costs, indirect costs, variable costs, etc.
In case you already have a network of multiple suppliers, you need to measure the quality of their products now and then to ensure you are giving your customers the best product/service.
In case a supplier stops meeting the required quality, do not hesitate to cut them off from your network and place them lower in your procurement chart hierarchy. Some measures you can keep in mind while doing quality assessment of the supplier are:
Compliance refers to monitoring whether the current supplier is meeting the business requirements efficiently and effectively. Some factors which can be kept in mind while calculating the compliance rate are:
Monitor if the supplier is supplying the goods exactly according to the purchase order provided. High discrepancies in the purchase order can lead to unexpected operational costs.
In case you notice the low accuracy of the purchase order, you can have a word with your supplier and work on making a more precise purchase order.
Ensure the below-mentioned details are properly highlighted in the purchase order:
Inventory aging indicates how often the products and supplies in your inventory are moving, i.e., how often your inventory runs out and you need to restock. A good inventory cycle is somewhere between 60 to 90 days.
A quicker moving cycle indicates good inventory management, whereas if the product has been sitting in storage for too long, that means you need to check your procurement cycle.
Inventory aging comes with the risk of product expiration, damage, misplacement, etc.
Procurement KPIs are very important performance and success metrics of a business. Remember to spend sufficient time on KPIs to ensure they liaise with the objectives and goals of your business. If you are struggling with them, you can always seek help.
Check out expense management solutions at Hubler to ace your procurement KPIs strategy and planning. Our various tools, like automatic invoice generation, expense management, budget designing, workflow automation, etc., can prove to be highly beneficial for you.