CASE STUDY

Critical Procurement KPIs Every Business Owner Must Measure

Mar 16, 2021

What is sustainable procurement KPIs?

Planning sustainable procurement KPIs is very essential for owners of large business enterprises to understand and quantify the real supply chain value to maintain a large base of suppliers and purchase categories. Developing the ideal supplier relationship management practices has become increasingly challenging with constantly increasing competition, rising costs, and the attempt to ensure quality over quantity. However, as businesses grow and supply chains become more complex, procurement has become an essential tenet of production, manufacturing, and development, leading to the need for high performance and efficient tracking of all changes. Therefore, many business owners and professionals utilize Key Performance Indicators (KPIs) to assess the efficacy and efficiency of their strategies, processes, and systems and the compliance, performance, and suitability of suppliers. Leveraging insights gained from procurement KPIs can help companies substantially reduce costs, improve quality, significantly enhance speed-to-market, ensure better supplier relationships, and overcome internal organizational shortcomings. However, various procurement KPIs are assigned to evaluate multiple factors, processes, and systems. Still, companies and supply chain managers must learn to identify and focus on the KPIs most imperative to their business, apart from seven necessary procurement KPIs.

How do you measure procurement performance?

Seven key procurement KPIs for every business owner to measure

Supplier Defect Rate: Ensuring supplier reliability and dependency is key to successful procurement for any business. Supplier defect rate aims to measure the individual quality and trustworthiness and is usually measured in defects per million. This procurement KPI helps determine suppliers that repeatedly cause errors, delays, failures within the procurement cycle and enables terminating, renewing, or replacing contracts according to tangible data. It also encourages constant reviewing and testing and reduces the probability of end-consumers receiving defective or low-quality products.

Cost Avoidance: Long-term contracts, trustworthy supplier partnerships, and sourcing the right equipment, supplies, or services can reduce costs substantially and impact short-term costs. This procurement KPI aims to ensure that businesses focus on sustainably and efficiently lowering costs by making smart and cost-avoidant decisions regarding purchases, investments, hiring, time, and savings. This may also include facing higher up-front costs but reduced maintenance, lifecycle, or replacement costs soon. Utilizing this metric to evaluate performance can help owners and managers identify the potential for higher savings, reduced long-term and short-term costs, and better investments.

Cost Savings: Achieving, tracking, and improving savings are imperative to the growth and success of any business. During the procurement process, achieving savings can be easy if managers and owners make wise cost-avoidant and cost-reduction decisions and identify problem points and mitigate unnecessary costs. This attempt can include identifying and shifting to better vendors or suppliers, analyzing the total cost of ownership about delivery costs and supplier management, and accounting for the time value of money. This procurement KPI helps keep stakeholders informed, and investors satisfied. High savings, cost-avoidance, and cost-reduction can bring about significant changes in a company’s expenses and enable growth, expansion, and better investments.

Procurement ROI: Every initiative should add value to your company. In some cases, this value may not be tangible and can lead to skill or growth within the company. However, tangible value is important and must be ensured. Procurement ROI is the assessment of value added by various initiatives, optimization of processes, and cost-avoidant or cost-reduction efforts introduced by managers or owners. This step also helps professionals and stakeholders determine the impact of investments, determine valuable and detrimental business decisions, and improve the overall quality of decision-making as per the tangible return on investment through the procurement process.

Purchase Order Cycle Time: Procurement and other supply chain processes require impeccable efficiency, speed, and execution. Placing a purchase order is the first crucial step toward receiving and utilizing products from suppliers, and executing it well requires speed and clarity. Industry leaders utilize up to 5 hours to complete this process, whereas companies at the other end of the spectrum may take up to 2 working days. This step can significantly slow down and hamper the production and manufacturing process. Measuring this procurement KPI will help identify problem points in the purchase order cycle time, improve efficiency, and make your organization more agile.

Supplier Lead Time: Speed and efficiency are imperative for all parties involved. While ensuring purchase orders are placed quickly and properly, measuring the amount of time taken by suppliers to respond and deliver to said purchase orders is equally important. This time is calculated when a supplier receives an order till it is shipped and often measured in days. It is crucial to obtain confirmation of availability and account for the time taken to deliver the final product. This procurement KPI helps identify efficient and trustworthy suppliers and enables growth for the company by improving and terminating supplier relationships as per data and clear KPIs.

Compliance Rate: Planned, executed, and signed contracts are binding and legally require compliance. However, in the throes of daily functionality, companies and suppliers can often fail to successfully achieve their part of the deal, leading to various business discrepancies. Therefore, it is important to measure and evaluate suppliers’ compliance rates and ensure that all contract details and standards are met. This step includes confirming that there is no difference in prices, leveraged services meet the standards promised, and the concerned suppliers can be trusted to deliver without additional assistance or persuasion.

You must develop a competitive strategy based on procurement KPIs measurement to maximize your business revenues in alignment with your sourcing and procurement goals. Get in touch with our expert analysts who can support you create a comprehensive business plan to scale 2021 higher

Success Story – SpendEdge

Measuring these seven procurement KPIs can serve as a game-changer for companies across industries and significantly streamline and optimize their supply chain. Recently, SpendEdge enabled substantial savings, optimization, and growth for a heavy equipment manufacturer. With the aforementioned procurement KPIs’ help, the owner identified various discrepancies in their supplier lead time, compliance rates, ROI, and purchase order cycle time.     Therefore, our experts helped the manufacturer develop an integrated system that enables tracking and overseeing KPIs and provided unparalleled recommendations to improve their procurement process and strengthen the supply chain. SpendEdge guidance and solutions helped improved supplier relationships, shorter purchase order cycle time, better compliance rates with trustworthy suppliers and vendors, and significant savings through various cost-avoidance and cost-reduction initiatives.

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