As their name suggests, KPIs (Key Performance Indicators) are more than just indicators. Taken as a whole, they make it possible to implement and manage a company's strategic purchasing dashboard.
How to recognise an effective KPI among the various purchasing monitoring indicators? Here is a list drawn up by Determine[i] which, incidentally, leaves out two indicators that have been overvalued: savings, and the number of suppliers under contract.
To simplify the management of the purchasing function, the purchasing monitoring KPIs can be classified into 3 main categories:
- The productivity of the purchasing team.
- The effectiveness of the implementation of supplier contracts.
- The appropriation of the purchasing policy by the business lines.
KPIs monitoring the productivity of the purchasing team
The productivity of the purchasing function is measured by its contribution to all purchases made by the company, as well as by the savings the company has made with regard to the expenses generated by this purchasing function.
The ROI of the purchasing function
The amount of savings generated by the purchasing team is only relevant when compared to the efforts the company has devoted to this purchasing function. The Return On Investment of the purchasing function is therefore the first KPI to be taken into account when measuring the efficiency of purchases (savings made on purchases/expenses of the purchasing function).
How much does the reduction in costs (including expenses avoided) induced by the purchasing function represent compared to the total operating cost of the purchasing function? This is what is meant by ROI.
The contribution of the purchasing function to all purchases
Each organisation has its own purchasing practices, and not all expenses necessarily go through the purchasing function. The second KPI precisely measures the share of the company's purchases actually under the control of the purchasing department.
In particular, some of the indirect purchases are often made outside of the process, along with the difficulty of rationalisation that this implies. It then seems logical that the productivity of the purchasing function should be measured through its real contribution.
KPIs assessing the effective implementation of contracts
The effective implementation of contracts is also measured by evaluating the properties of the products, their price, and their quality, as well as compliance with their delivery deadlines.
This third KPI is preferred to the calculation of the percentage of suppliers under contract, insofar as that indicator does not address the reality of the application of the agreements.
On the contrary, the cost/value correlation (or LPP, i.e. Linear Performance Pricing) takes into account:
- Actual compliance with the contracts through the calculation of the number of purchase lines invoiced outside of the reference prices.
- The percentage of total expenses that these overruns represent.
Average execution time
The price charged is not the only indicator of customer satisfaction. Often, a delay or a defect in product quality can cause far greater damage to the business or the company's reputation.
Compliance with contractual delivery deadlines and, more generally, the level of service, is therefore considered as an important KPI, enabling the relevance of the purchasing strategy to be assessed.
The KPIs verifying the adherence of the business lines
The adherence of the business lines to the purchasing process is measured by the proportion of orders placed outside of the contract, as well as by the actual duration of the ordering process.
The rate of purchases made outside of the contract
Although the vast majority of the company's expenses are theoretically covered by supply contracts, it is still essential to ensure that the details of these contracts are known and complied with by the various business lines within the company.
The fifth purchasing performance KPI therefore controls that the ordering party does comply with the procedures. It specifically follows two values over time:
- The proportion of expenses incurred outside of the contract when a contract exists.
- The price difference, that is to say the cost induced by such alternative behaviour.
The duration of the ordering process
The last of the 6 KPIs focuses on providing areas for improvement to the ordering process itself.
A protocol is defined, and determines the step-by-step procedure to be followed in order to make savings for the resources used. However, to be actually effective, this process must be shared and applied to all layers of the company.
In particular, the acceleration of the ordering process depends on:
- The quality of the drafting of purchase requests.
- The speed of validation of requests.
- The fluidity of the production and transmission of purchase orders.
It should be noted that digitisation is a lever facilitating the optimisation of this indicator. It makes it possible to harmonise practices, in order to avoid blocking the order, and to track validation flows.
In conclusion, the continuous improvement of purchases is based on the objective measurement of KPIs occurring at various stages of the purchasing process. However, the company's collective mobilisation with regard to these indicators is what matters most and what employees must keep working towards. The role of purchasing is therefore also an educational role. Limiting oneself to “traditional” purchasing techniques hides part of the potential for improvement, which can be very important depending on the company.
The fragmentation of purchasing management is clearly an obstacle to the improvement of purchasing performance, or even to the identification of harmful failings. Read the article on this subject by Pierre-Olivier Brial, Deputy Managing Director of Manutan France: Purchasing process: how organisational silos slow down efficiency.
[i] Article published in October 2020