How to choose your Procurement KPIs & Metrics?

There are many events that can turn the life of a company upside down. You need effective strategies to deal with them, increase profitability and maintain competitiveness. Good purchasing management is one of the measures you need to adopt. Purchasing accounts for almost half of your company’s expenditure each year, according to the national average.

In general, the effectiveness of the purchasing process is determined by the savings made. But this method of evaluation is incomplete. It’sbetter to establish reliable metrics, including purchasing KPIs (purchasing performance indicators).

Purchasing performance indicators

KPIs (Key Performance Indicators) stand for Key Performance Indicators. They areperformance measurementtools . They are very different from simple metrics. The latter simply quantify activity at a specific point in time. KPIs have more important functions. They are used to measure the overall effectiveness of a process, taking into account the objectives.

Note that it is your duty to monitor the effectiveness of existing processes if you are responsible for the supply unit. This makes it easier to steer operations. But for successful monitoring, you need to take good performance indicators into account.

You need to analyse this data carefully. This will help you to identify ways of increasing your margin and improving the quality of the products you order. It will also make it easy for you to develop a strategy for dealing with incidents such as a supply disruption.

• Further information: The different types of risk for your purchasing process

Why use purchasing KPIs?

Why should you set purchasing metrics? First and foremost, you need to know that these indicators are information derived from an analysis. There are many advantagesto defining KPIs.

A means of measuring the performance of the purchasing team

Measuring your team’s performance is a way ofidentifying your department’s strengths and weaknesses .The results will enable you to find solutions to remedy the situation. Optimising their efficiency boosts their productivity and at the same time improves the quality of the work done .

Drawing up a diagnosis of the organisation of the supply chain

Every purchasing office manager needs to put in place effective activity planning. This will make operations smoother and faster. Setting indicators enables you to assess performance. If there are any shortcomings, you need to make the necessary adjustments. If the system is already effective, you can improve it further.

Evaluate the effectiveness of the available action plan

The action plan brings together the strategic objectives for reducing costs and the steps to be taken to achieve them. The question is: is it effective? Should it be replaced? By using an appropriate KPI, you can obtain the answers to these questions.

Making the right decisions

Purchasing KPIsare clear, reliable figures. They can help you make informed decisions. That’s another reason to set and analyse them!

Other benefits of using KPIs

There are manyadvantages to having key indicators in place when measuring the performance of the purchasing department. Add to the list the power :

• evaluate whether each objective has been achieved,
• know how the process is developing,
• estimate contract performance
• monitor and adjust planned actions if necessary.

How to use purchasing KPIs?

In reality, the evaluation parameters should be grouped together in a dashboard. Also known as a dashboard, this is an essential tool for buyers and purchasing managers. It enables you to measure the performance of your purchasing circuits. Each KPI can also be used to track progress.

A dashboard containing relevant KPIs is an effective operational management tool. It enables you to monitor the completion of all tasks and the application of the action plan put in place.

A dashboard with the right KPIs also gives you an overall view of your department’s activities. You’ll be able to rely on figures when making decisions, rather than on guesswork.

What are the different types of key indicators?

There are several measures of purchasing performance. They fall into three categories:

KPIs for tracking purchasing efficiency

How can the procurement unit contribute to the company’s development if it lacks performance? That’s why it’s important to measure its productivity. To do this, you need to take into account two important metrics.

ROI or Return on Investment

ROIis a key indicator of the performance of the purchasing cell. That’s why you need to calculate it. The first step is to determine the savings achieved. To do this, you need to take into account :

• costs avoided
• the reduction in outgoings,
• the total cost of ownership or TCO,
• direct and indirect costs.

You then need to calculate the costs incurred in running your service. You can then determine the ROI using the following formula: savings made / purchasing function expenditure.

Analysing this indicator is one way of assessing the financial effectiveness of purchasing. It can also be used as anoperating indicator for the purchasing management unit .

The proportion of purchasing under the department’s control

Not all purchases made by a company are under the control of the purchasing department. There are class C cash outflows and unplanned purchases. These will make it difficult to rationalise purchasing.

The proportion of purchases under your control is an important metric. It will enable you to measure your productivity according to your actual contribution to expenditure and not according to hypothetical data. The information to be analysed is therefore more precise.

Contract performance KPIs

It doesn’t matter howwell you’ve negotiated each purchase contract if suppliers don’t respect the content. That’s why we need to evaluate the actual implementation of the agreements we sign. This is an important measurement tool when evaluating the purchasing function . There aretwo KPIs you can use to assess contract implementation .

The cost/value ratio

Also known as LPP (Linear Performance Pricing), the cost/value correlation is used to assess contract compliance. It takes into account two variables:

• the number of purchase lines billed outside the specified rates,
• the percentage of costs generated by these overruns.

This KPI enables you to determine the real monetary value of a product or service. Its analysis also enables you to determine whether the cost overruns observed are justified or whether they are linked to errors.

Finally, analysing this performance indicator helps you to identify any adjustments that need to be made. The ultimate aim of this procedure is to save money without compromising the quality of the goods ordered.

Turnaround time

This indicates the time taken to send out orders and receive products. By closely monitoring these elements, you can identify any flaws in the process. They also reveal problems with the supplier, who should speed up delivery to satisfy customers.

In other words, this indicator enables you toidentify the obstacles hindering the performance of your purchasing system .

CSR KPIs (Corporate Social Responsibility)

CSR brings together the standards to be applied when purchasing goods or raw materials. It must be taken into account if you want to implement a responsible purchasing strategy. It is proof of your company’s performance. Here are a few examples of CSR-related KPIs that you can incorporate into your monitoring panel:

• cO2 impact per item purchased,
• the social impact of each supplier.

KPIs highlighting compliance with policies and processes

You don’t just need to monitor the reliability and performance of your suppliers. You also need to observe and examine your purchasing habits. Here are the key elements you need to take into account.

Purchases made outside the contract

Ingeneral, company expenditure is generated by procurement operations. However, some agreements are made within other departments and could generate costs. The rate of non-contractual purchases is therefore another KPI not to be overlooked. It allows you to monitor :

• expenditure incurred outside the contract
• the price differential or the cost generated by these non-contractual purchases.

The duration of the purchasing cycle or ordering process

This is another key performanceindicator to be taken into account. The purchasing or ordering cycle is made up of different stages. Its effectiveness depends on three factors:

• the quality of order drafting
• the speed with which purchase requisitions are validated,
• the fluidity with which orders are issued.

By analysing the duration of the purchasing cycle, you will be able to identify delays and areas for improvement .

Quality benchmarks

To manage your purchasing portfolioeffectively , you can also add the following KPIs to your control panel:

• product conformity rate
• order frequency
• supplier contracting rate

Achieving these objectives will be even easier if you use high-performance purchasing management software like Weproc. It’s a solution that can be easily integrated into any modern business to streamline internal procedures and better control cash outflows .

 

Want to learn more about our procurement management software Weproc? Contact us or request your free 15-minutes demo below!