Procurement KPIs to Monitor
By Hugo Britt | March 10, 2022
In a previous article, we wrote about the importance of regularly and consistently monitoring supplier performance across a range of metrics. Tracking key performance indicators (KPIs) can help procurement teams ensure that all suppliers comply with obligations outlined in a contract.
Internally, KPIs also help procurement leaders find efficiencies, work with the best suppliers, and lower risk. Supplier KPIs aren’t the only metrics procurement teams should measure, however. Tracking metrics across a range of operations can help procurement teams improve performance.
PO & invoice accuracy
Purchase order and invoice accuracy helps measure whether suppliers are delivering what was ordered, as well as whether or not delivery arrived on time. Inaccurate purchase orders and suppliers can increase operating costs, slow down business operations, and make it difficult to keep accurate records — critical in the event of an audit.
Rate of emergency purchases
Emergency purchases are the fundamental contributor to rogue spend, considered any spending not managed by procurement. By some estimates, maverick spend accounts for up to 80% of some organization’s total spend. Organizations that track emergency purchases are able to get a handle on how much of the budget is being wasted on rogue spend, and take steps to reduce it.
Purchase order cycle time
Also known as procurement cycle time, this metric helps procurement teams reduce the time that passes between when an order is placed and the final delivery of the goods or services.
“Up-front savings are fantastic, but there are other ways to lose money due to inefficiencies, and one of these is the loss of productivity due to purchased goods not being where they need to be at the required time,” wrote Tarek Alaruri, COO & Co-Founder of Fairmarkit.
Purchase order cycle time can also help you improve your internal processes to see if there are bottlenecks in the approval process.
Spend under management (SUM)
Spend under management is the percentage of procurement spend that is regulated or controlled by the management. This is spend that is subjected to regular analysis, meaning that contracts are all reviewed well before they conclude and renegotiated as needed to constantly optimize, find alternatives as necessary, and add value to purchasing decisions.
Ideally, procurement teams want as much spend under management as possible in order to lower costs and forecast expenses.
Cost per invoice or purchase order
For procurement teams laser-focused on costs, this metric can help find opportunities for automation — and therefore cost savings. Cost per invoice evaluates all the costs that go into approving and processing an invoice or purchase order.
Those organizations that manually process invoices will have higher costs than those that use software to digitize and route invoices and purchase orders. According to one survey, one organization with little automation could spend up to $10 or more per invoice.
Price competitiveness is a measure of the price paid by the buyer in comparison with the published market price. Buyers can increase price competitiveness by inviting more suppliers to bid on a contract. The more vendors that compete, the better the likelihood of getting a competitive price advantage for your business.
Procurement Return on Investment can help customers determine the profitability and cost-effectiveness of a specific procurement investment. For instance, if your procurement team seeks to integrate an ERP or sourcing tool, you can measure its efficacy with procurement ROI. This calculation is:
Procurement ROI = Annual cost savings / Annual procurement cost
These metrics can help provide deeper insight into your procurement function. With this insight, you can make smarter decisions about your supplier relationships, procurement spending, and business processes.
Looking for a way to move the dial on a broad range of procurement KPIs as efficiently and effectively as possible? Connect with Una to learn how the power of group purchasing can change the game for your procurement function