As far as procurement managers are concerned, one of the primary goals is to ensure that the company’s procurement teams are as efficient and effective as possible. Some of the other areas of concern include reducing unnecessary spend, lowering cost, accelerate procurement cycle, and to ensure compliance. But how they correctly measure if these goals are being accomplished successfully? Managers must be in a position to carry out the right procurement analytics tools that would help them track results, measure progress, and identify the areas of improvement. Furthermore, with the help of procurement analytics and the right KPI metrics, it is possible to track whether the procurement team is delivering the value-add that has been planned. Here are some of the top KPI metrics that every procurement manager needs to keep track of :
Most companies face the problem of employees indulging in ‘rogue spending’ without going through the proper approval channels. One of the critical steps to optimize the procurement efforts is to reduce if not eliminate the maverick spend altogether. Cutting down 5 to 10 percent of maverick spending can translate into millions of dollars of cost savings at large organizations.
The success of a procurement strategy largely depends on the amount of cost savings attained. It is essential to identify whether switching vendors or suppliers could yield better prices. Also, it is important to focus on the total cost of ownership (e.g., delivery costs, supplier management, lifecycle costs, etc.) and consider the time value of money. Unavoidable cost increases such as inflation or energy prices should be taken into consideration while ascertaining cost savings KPI metrics.
This KPI metrics help you to understand very clearly whether your initiatives are adding value to your company or not. If a significant amount of money is spent on procurement efforts but if those expenses do not help the company to realize the expected return on investment, then it is best to cut down or take corrective actions to realigns such spends.
Purchase order cycle time
Purchase order cycle time is a KPI metrics that help companies to measure how quickly the purchase orders can be placed. Top companies typically take only five hours—about half business day—to send a purchase order to a supplier. The quicker a purchase order is placed, the more efficient and agile your organization will be.
Total spend by vendor
This KPI metrics is highly beneficial for procurement teams. This metrics helps to identify how many suppliers the company is depending on and the deals made with each vendor. By consolidating the number of vendors you work with, you increase the chances of lowering costs by sourcing materials and services in a more affordable fashion.
During procurement, companies enter into contracts with several vendors and suppliers. It is essential to keep track of whether the prices paid are as agreed upon, the parties meet the standard of service-level agreements signed, and the quality standards are adhered to or not. The closer a company gets to 100 percent contract compliance, the better.
Procurement managers often fail to track the efficiency improvements that can be made to reduce the cost of labor associated with procurement. This KPI metrics helps to understand ways to reduce the overall cost of procurement by eliminating the need to hire additional staff.