How to Identify the Right Procurement KPIs for Business?

By CIOReview | Tuesday, August 13, 2019

Key performance indicators linked to suppliers, employees, and organizational performance serve as measuring tools to keep track of business.

FREMONT, CA: We all have key performance indicators (KPIs), if we go for annual physical assessment, personal KPIs include weight, blood pressure, cholesterol, and other crucial health-related data points. These are not one-off measurements, but ones that you can track over time to analyze your health trends.

Key performance indicators are measurements that are deemed critical to a company or process performance, generally calculated and regularly evaluated. They assist in making decisions and can monitor several intrinsic and external factors.

Most organizations have data, and reports are readily available via ERP systems. But sometimes in the easy way to accumulate data, generated in a whole range of statistical abstracts and beautiful pie charts, necessary measurements are lost.

The location to start is to select a sequence of baseline KPIs that will assist evaluate the efficiency of the procurement over time. They must be realistic, meaningful, and helpful in handling provider, employees, and organizational performance when it comes to procurement KPIs. Once recognized, extra KPIs that can assist treat a wider variety of company operations can be included.

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The following KPIs are not a complete list, but a starting or benchmarking location for the method:

Supplier-Related KPIs

• Number of Suppliers: The overall amount of providers is a significant number to monitor as many supply management organizations seek to decrease the size of their supply base to generate less administrative job and  leverage more substantial relationships with fewer providers. Another vital measure when considering capacity-related sourcing decisions is the number of suppliers in a specific commodity area.

• On-Time Delivery by Supplier: This KPI is the supplier performance gold standard. A KPI measuring the general on-time delivery metric may demonstrate trends, but an employee on-time service KPI provider is a critical indicator of supply management results.

• Spend: KPIs in this field include the overall amount spent on all suppliers, the money that is spent on direct and indirect suppliers, the money spent on specific commodity areas and the amount spent per supplier.

• Quality Performance Rating: This KPI can indicate a general quality supply base ranking, but particular supplier-level quality KPIs are critical to measuring specific performance.

• Supply Chain Risk: Due to the range of future hazards, this may be a hard KPI to create. One related KPI would be tracking the number of sole-source suppliers as they provide the most significant risk opportunity.

   Employee-Related KPIs

• Spend Per Employee: This is a common but infuriating KPI. Buyers can manage critical suppliers, but they don't spend much cash. Others may spend a significant quantity with a few providers, possibly in an automated format. For staffing and support needs, aggregate spending, split into direct and indirect spending, and those spending analytics in commodity fields is crucial.

• Cost Savings or Cost Avoidance: Buyers often maintain their cost savings related to KPIs while others rely on reports generated by ERP calculated by last time buy or standard cost calculations.

• Spend Under Contract: In this region, KPIs can calculate the number of official contracts or agreements, spend on authorized providers and the quantity of maverick spending, which is money spent on unauthorized providers or outside normal procurement processes.

• Purchase Order Cycle Time: This KPI is a measure of the procurement department's effectiveness and can include automated transactions and the positioning of individual orders. KPIs can also be set up for direct and indirect spending in this region.

• Training and Development: This KPI can track staff development training hours.

Organizational KPIs

• Supplier Payments within Conditions: The accounts payable department should track this KPI. In supplier relationships, on-time payment to suppliers is an important aspect and impacts the overall performance of suppliers.

• Inventory Accuracy: Poor precision in the inventory leads to scarcities and pressure on both providers and buyers. Using ABC inventory analysis, this KPI can be further broken down.

• Receipts Made the Day Goods Received: Formal receipt of products directly affects other KPIs including on-time delivery performance measurements on the day they are obtained. This KPI is an indicator in the receiving area of process controls and staffing.

• The Ratio of Spend to Sales Revenue: This KPI is a common one produced by calculations of the income statement and is linked to the price of selling products. This KPI measures the content of purchases and affects the working margins.

• Inventory Turnover: Inventory turnover is a velocity measure and directly affects cash flow. High stock turnover is a beneficial attribute, but high-performance providers require more frequent on-time deliveries. Throughout operations and finance, this KPI has a far-reaching impact.

The overall strategy of the supply chain could identify several goals around cost savings, the delivery performance of suppliers, and the performance of staff. Objectives that support these objectives may include a particular target for a timely delivery. Tactics supporting the goals, such as distributing performance data to suppliers, would offer a way to get there. The KPI would function as the measuring tool for the purposes, goals, and tactics identified. There are no right and wrong KPIs; only essential aspects of the business need to be measured.

Organizations without a formal strategic objective may still use KPIs to monitor essential metrics as efficient instruments, but they would be less efficient than those aligned with a rigorous approach. These organizations should define a variety of KPIs for necessary company results.

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