How can you improve and add value to your procurement performance?

Procurement strategy
February 4th, 2025
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Procurement is a strategic lever for a company's competitiveness, differentiation and value creation. That's why it is necessary to assess, and above all, to improve and enhance procurement performance. Procurement performance now reflects much more than just annual cost savings, it now indicates a robust supply chain or the satisfaction of internal customers, for example. And to properly manage this multifaceted performance, it requires implementing a solid procurement strategy and defining relevant indicators.

What is procurement performance?

Procurement performance refers to the efficiency and effectiveness of expenditure managed by the organisation's procurement department. In other words, its ability to obtain quality goods and services at the best possible price.

Measuring the procurement performance is essential in order to provide internal and external stakeholders (general management, business functions, suppliers, etc.) all the keys to understanding the added value of procurement, identifying areas for improvement and, lastly, establishing its strategic position within the company.

To measure procurement performance, we naturally rely on data, used to feed the previously identified key performance indicators (KPIs). These procurement KPIs are then presented in an intelligible and visual way through dashboards. This is how procurement performance is brought to life throughout the company.

The five key dimensions of procurement performance

For a long time, procurement performance was solely focused on the economic aspect: Cost reduction, return on investment (ROI)... However, this concept has since taken on other forms: Still economic, but also related to supplier relationship management, the level of service provided to users, process efficiency or even human resources.

1. Economic performance

The first axis focuses on economic performance. This of course includes the classic measures of price savings achieved. This covers well-known buyer strategies such as contractual negotiations to obtain preferential rates, strategic sourcing of new suppliers, consolidating purchases to benefit from economies of scale...

Today, economic performance also extends to the total cost of ownership. In other words, the overall cost of a good and/or service throughout its life cycle. This includes the purchase price, of course, but also all other costs: Acquisition, possession, maintenance, use, non-quality, withdrawal...

What KPIs?
·       Procurement savings;
·       Procurement department's return on investment;
·       Procurement department's contribution to total spend;
·       Coverage rate.

How to calculate procurement savings?

To evaluate the economic performance of the procurement function, savings achieved on purchases are generally calculated on an annual basis. This is used for reporting purposes, but also for communicating on the procurement function's contribution to financial results. There are commonly three main different calculation methods.

·       Savings on a known spend

This formula applies to recurring purchase orders for which there is a reference price (previously applied rate, last/first offer, etc.). It is obtained by calculating the difference between the price actually applied and the historical price, multiplied by the forecast consumption volume.

Savings on known spend = (reference price - applied price) x forecast volume.

·       Savings on an estimated spend

This method is best applied to project purchasing, in the context of outsourcing, for example. The difficulty lies in the absence of a reference value. The recommended method is then based on a comparison between the price actually paid for the service and a reference for this type of task or activity. This reference can come from a market study.

Savings on estimated spend = (reference price - applied price) x forecast volume.

·       Savings on a budget forecast

This process has the advantage of being adapted to the company's economic means, but it may lack realism with respect to market prices. Savings are calculated here by the difference between the budget displayed at the outset and the forecast volume multiplied by the actual purchase price obtained.

Savings on a budget = budget - (forecast volume x applied price)

2. Supplier performance

The second axis focuses on supplier productivity. This generally includes the fulfilment of their commitments with product and/or service quality, costs, order processing and delivery times.

It can also entail the value-added services that suppliers can provide. This can be their ability to support the procurement teams, to share relevant information... These are all elements that allow procurement teams to better control their spending or understand the market.

What KPIs?
·       Cost/value correlation;
·       Supplier non-compliance;
·       Supplier service level.

3. User service performance

The third axis focuses on the level of service appreciation provided by procurement to the company's internal customers. This translates into relevant responses to procurement requests, a certain responsiveness, concrete assistance in improving specifications and stimulating innovation, etc.

What KPIs?
·       Rate of purchases made off contract;
·       Internal customer satisfaction.

4. Process performance

The fourth axis looks at the performance of procurement processes and best practices. This is reflected through simplified procurement procedures, the digitisation of transactions via e-procurement tools, the pooling of data in a dedicated information system...

What KPIs?
·       Digitalisation rate of transactions;
·       Procurement process duration.

5. Human resources performance

The fifth and final axis concerns the procurement teams' development. This includes buyers training and upskilling, the sourcing process, the recognition system...

What KPIs?
·       Percentage of buyers who have received training;
·       Retention rate;
·       Turnover.

The procurement performance of tomorrow

While we are facing an increasingly volatile, uncertain, complex and ambiguous (VUCA) world, many procurement professionals suggest rethinking the concept of procurement performance in companies. Until now, procurement performance has been primarily focused on the short and medium term, based on limited data.

Tomorrow, it will be important to integrate other dimensions into procurement performance such as overall risk management and corporate social responsibility (CSR). As Natacha Tréhan, PhD, Associate Professor and researcher specialised in procurement strategies and supplier management, points out: "The challenge is not limited to compliance with new sustainability reporting requirements; the real challenge is to create the conditions for lasting success in an increasingly uncertain world." We can imagine teams in the future equipping themselves with new procurement key performance indicators related to climate change, pollution or the circular economy.

In addition, the assessment of procurement performance must increasingly include suppliers. In addition to assessing the performance level of your partners, it is important to measure their level of satisfaction, for example. This lays the foundations for a constructive business relationship, with a win-win approach.

It must also be rethought, using the latest technologies and AI in procurement to simplify its implementation. Ultimately, it is about automating data collection, processing and analysis. This paves the way for the exploitation of a wide range of real-time data as well as in-depth spend analysis at different levels (suppliers, purchasing categories, countries, value chains, etc.).

In short, calculating procurement performance is essential to make informed decisions, initiate the right improvement axes and thus make the procurement function shine within the company and beyond. Above all, it is a key step in contributing to the company's resilience and that of its entire supply chain, in the long run.

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