Key Procurement KPIs That Every Business Owner Should Be Measuring
What Are Procurement KPIs?
Organizations are continually looking for ways to enhance their procurement processes. However, to improve a process, it is important to first quantify and measure the existing system. The metrics that are used to evaluate procurement are procurement KPIs or “Key Performance Indicators”. The exact performance KPI list varies between companies and industries. But, the key performance indicators for suppliers are almost the same. They measure and help to evaluate how well the procurement process of an organization is performing in terms of cost, time, and quality. They also have to give meaningful insights into how well the entire procurement process is working with the rest of the organization’s processes.
Quality Performance KPIs
It is very important to maintain predetermined quality standards of the procurement process. This affects the quality of the rest of the processes of the organization. Supplier performance metrics that analyze the quality of the supply are:
This procurement indicator reveals if the suppliers to the company fulfill the specifications set out. To keep this at an optimal level there should be strict quality inspection measures and penalties imposed in contracts with suppliers. The ratio of the number of disputed invoices and the total number of invoices is the compliance rate. One can also quantify the defect rate of each supplier by the ratio of defective quantity versus the total number of the ordered quantity.
Compliance in terms of cost can be measured by comparing the price initially quoted by the supplier with the final price paid.
Purchase Order Compliance:
When there is a deviation between the requirements stated in the purchase order and the actual delivery, it impacts the efficiency and timeline of the entire process. Studying the deviations if any from the stated time, quantity, and quality in the purchase order helps to rate suppliers.
Time Performance KPIs
Timely delivery of all supplies is highly desirable in a supplier. Even good quality supplies when delivered late adversely impact the overall process. Procurement purchasing KPIs that measure the time aspect of procurement are:
The time that a supplier takes to fulfill an order is the lead time. Ideally, this procurement KPI will be as short as possible without impacting the quality or cost KPIs. The suppliers who do well on this metric can be listed for the procurement of supplies in emergencies.
Purchase Cycle Time:
The procurement team and process should be agile enough to create a requisition for a supply, make a purchase order, and receive the delivery in as short a time as possible. When the purchase cycle time in an organization is poor it reveals the sluggishness or inefficiency of the procurement team and process.
This is measured by the ratio of the total availability of stock with the supplier versus the quantity procured from that supplier. A supplier with a high rate of availability will be better able to respond to a sudden surge in demand or emergency orders.
Procurement should ideally secure the best quality supplies at the most advantageous price promptly. The cost component of all procurement directly impacts the entire cost of the finished product. To stay competitive, a company should produce the best quality product at a reasonable cost. The cost related procurement KPIs are:
Purchase Order Cost:
The amount spent internally by the organization to create and process an entire purchase order is the purchase order cost. Companies have brought down this procurement KPI by automating much of the procurement process.
Spend Under Management:
When procurement is regulated by management, orders go to approved suppliers at pre-negotiated rates. A procurement process that routinely disregards the approved suppliers is less cost-effective. This metric is calculated as the difference between management approved expenditure and unapproved spend.
The ROI reveals how cost-effective the entire procurement process is. It is the ratio of the cost savings and the total procurement cost. This is one of the key procurement KPIs and is calculated on an annual basis.
Procurement Price Competitiveness:
This procurement KPI is the comparison of the prices paid compared to the prevailing rates in the market. The procurement team must always be in touch with changes in the market rates to negotiate the most advantageous purchases.
Tracking these key parameters on a constant basis can help procurement team heads and business owners decide if their current processes are on the right track. Discover more such procurement-related blogs and information in our blog section.
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