The six essential KPIs for efficient procurement

KPI procurement department
February 23th, 2021
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As their name suggests, KPIs (Key Performance Indicators) are more than just indicators. KPIs are "key", meaning that, combined, they form a strategic scorecard for managing procurement.

How do I determine which procurement indicators are KPIs? The following is a list compiled by Determine [1] that omits two overrated indicators: savings and the number of suppliers under contract.

To simplify procurement management, the KPIs listed are split into three main categories:

Two KPIs for tracking the productivity of the procurement team

Procurement ROI

The volume of savings generated by the procurement team has relevant value only in relation to the volume of the company's resources dedicated to the procurement department. Therefore, measuring return on investment (ROI) is preferable, making this the first KPI.

How much is the reduction in costs (including avoided expenses) resulting from procurement work compared to the total operating costs of the procurement department? This figure is the ROI.

The procurement department's contribution to purchases

Each organisation has its own procurement practices, and some expenses may not pass through the procurement department. Therefore, the second KPI accurately measures the proportion of the company's purchases that is actually controlled by the procurement department.

In particular, it is frequently the case that some indirect purchases are made outside the process, causing difficulties in terms of rationalisation. It is easy to understand that the productivity of the procurement department must be measured based on its actual contribution.

Two KPIs for assessing the effectiveness of contract implementation

Linear performance pricing

This third KPI is preferable to calculating the percentage of suppliers under contract, as the latter indicator does not take into account the degree to which the contracts are being implemented.

In contrast, the LPP (Linear Performance Pricing) factors in:

  • Actual contract compliance (by calculating the number of product lines invoiced outside the reference prices). 
  • The percentage of the total expenses that these overruns represent.

The average delivery time

The price charged is not the only indicator of customer satisfaction. And often, delays or insufficient product quality can have an even more negative effect on the company's business activity or reputation.

Therefore, the level of service, or at least compliance with the contracted delivery times, is considered a KPI.

Two KPIs for checking the compliance of other departments

The number of purchases made outside the contract

The procurement department does its job well and, in theory, most of the company's spending takes place within the framework of supply contracts. But do other departments know about and comply with these contracts?

The fifth KPI for procurement performance can therefore be used to ensure that the departments placing orders are complying with the established procedures. It tracks two specific values over time:

  • The proportion of expenses incurred outside the contract in cases where a contract exists
  • The price gap (i.e. the cost incurred by deviating from the established procedure)

The duration of the ordering process

The last of the six KPIs focuses on indicating areas for improvement within the ordering process itself.

A defined procedure outlines the steps for making purchases in a way that minimises the resources used. But to be effective in reality, the process must be shared and applied. 

In particular, the degree to which this speeds up the ordering process depends on:

  • The quality of the content of the purchase requests
  • The time taken for requests to be approved
  • The regularity with which purchase orders are created and sent

It is worth noting that digitalisation can help to optimise this indicator by standardising practices—with non-standard orders being blocked—and by tracking the approval workflows.

 

In conclusion, these six KPIs must be objectively measured to ensure the continuous improvement of procurement performance. But the key thing to remember and address is the need for the company as a whole to become engaged in boosting these indicators. Procurement departments must therefore also play an educational role. By focusing solely on procurement techniques, you disregard what may be a very significant area for improvement, depending on the organisation.

If purchases are not made following a standardised process, this clearly prevents you from managing the improvement of procurement performance and, more importantly, from identifying areas that are not working well and may have negative effects. Read about this topic in the article by Pierre-Olivier Brial, Managing Director of Manutan France: How do siloed organisations reduce the effectiveness of the procurement process?

 

[1] Article published in October 2020

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