Author: Christoph Zacharias
Why KPI is an absolute necessity in procurement?
Key performance indicators of any kind seek to track and optimize a business’s progress toward pre-defined goals. These are quantifiable measures that tell a CXO, for instance, how much she has progressed toward a target in the shorter or longer term. Key performance indicators for procurementare no exception. They provide predetermined standards against which procurement organizations measure the efficiency (or lack of it) of their processes and activities and use that as a basis to maximize their output. Further, this exercise will help CPOs ascertain whether or not they are on track to realize their overall aims and long-term plans.
Moreover, over time, by keeping a close eye on every KPI, businesses can identify the general direction in which procurement is developing and catch sight of anomalies before they start to wrack the system. KPIs ensure improvement initiatives are rolled out well in advance, instead of just before the last moment (!), to realize cost savings and streamline processes and tasks. Improved collaboration, communication, and partnership with the supplier base are some of the other benefits that flow to the procurement function from regular KPI monitoring. The old order must yield place to new, and so is it with the key performance indicators for procurement.
No organization can afford to leave these most-important performance measures static. There is a pressing need to continuously revisit, revise, and recalibrate KPIs, so they deliver what they are expected to deliver, namely, lower costs, more dependable supplier relationships, and high-quality goods.
Importance of the Service
There could be ‘n’ number of KPIs in the procurement world, depending on the mid-to-long-term goals an organization is gunning for. For instance, this author considered nearly one score key performance indicators for procurement before whittling the list down to the three below.
Spend analysis
These measures bring home the big picture of where and how money is spent across the organization and on what product categories or groups. There are multiple KPIs at work here, and together these enable procurement teams to measure what fraction of the spend is on the radar of spend analysts and what is flying under it! These key performance indicators for procurement also express potential cost savings as a percentage of total spending. Spend analytics KPIs are many, covering maverick spending as well as various authorized and approved expenditures.
Supplier performance
In this case, the KPI tracks the effectiveness and dependability of suppliers based on key data such as the rate of on-time deliveries, capability to provide high-quality products, and ability to fulfill contractual obligations. These key performance indicators for procurement let businesses keep an eagle eye on product defect rates, supplier numbers, spend per vendor, and even the money spent within specific commodities. Lead time for delivery is ascertained as well as suppliers’ responsiveness levels in times of eventuality. At least one KPI keeps growth of supplier numbers and associated admin complexities in check while another sheds light on vendors who overshoot expected purchase rates.
Cost savings
As the title suggests, the end goal for these KPIs is to estimate whether the procurement organization’s mid-to-long-term cost management gameplans are paying off or not. Not surprisingly, the ROI from the multitude of procurement activities turns out to be a critical KPI. Shortlisted vendors’ cost management practices and price competitiveness are also some of the foremost key performance indicators for procurement. Cost reduction is a KPI that deserves special mention. This one estimates the direct impact of cost control and optimization measures on company margins (“hard savings”). By contrast, cost avoidance explores ways to rein in costs and expenses in the future (the so-called soft savings). Long-term costs and expenses, transition costs, and security costs are also factored into this exercise.
How SpendEdge can help you?
SpendEdge is home to a team of dedicated procurement consultants who are past masters in supplier intelligence, and these experts work closely with procurement managers at client organizations to help them identify the most cost-effective suppliers – be it for raw materials, finished products, or services. Over the past more than two decades, we have brought to perfection evaluation processes for thoroughly vetting supplier capabilities. Supplier skills and potential are quantified across multiple parameters not limited to quality, reliability, and cost-effectiveness.
By drawing on relevant procurement market intelligence, our specialists pin down suppliers who offer competitive prices with remarkable accuracy. Our in-depth study of supplier ecosystems as well as key performance indicators for procurement covers myriad aspects like suppliers’ throughput, delivery accuracy, and technology prowess. With deep, accurate, and timely data at their fingertips, our consultants are well placed to provide clients of all sizes with informed recommendations. So, they can make better decisions around supply chain efficiencies.
With intelligent KPI guidance, a mining business improves key procurement outcomes
Our client, a publicly traded company, is a “junior exploration business” with sights set on mineral, oil, and gas exploration. Limited financial resources and challenges in raising funds are key issues across the junior mining business sector and our client too has reasonable apprehensions on that count.
For the client’s procurement organization, keeping a close watch on raw material fluctuations is a pain repeated almost daily with no end in sight. Further, supply-side participants need to be evaluated along multiple parameters (e.g., material specs, chemical composition, compliance with mining standards, delivery lead time, dependability, and more). Issues plaguing the sector, across the board, include fluctuating values of commodities, metals, and energy. At the same time, regulatory mandates keep changing almost at the drop of a hat and navigating them is a major challenge for sector participants.
In the light of the uncertainties previously discussed, the mining business felt an immediate need to embrace key performance indicators for procurement to drive efficiency, control costs, and manage risks in its procurement. Our procurement experts entered the scene early on, and the arrival of our specialists with significant years of experience in strategy support under their belt was quite reassuring for the client.
Key steps in KPI implementation
Our experts set to work and as a first step, they took stock of the systems, activities, and various resources that constitute the procurement organization. This apart, the team carefully considered the business’s long-term procurement plans to chalk out the next steps. Our team comprises old hands in procurement, and these specialists stepped up to support the client in selecting the right set of key performance indicators for procurement. Our specialists made sure the KPIs they picked were fully compatible with the company’s “grand design” (aka overall plan of action). Such most-beneficial quantifiable measures carefully chosen by our team from a field of alternatives included cost savings, supplier performance, and on-time delivery.
Order accuracy, cycle time, and inventory management were the other KPIs in the kitty. As a next step, we joined the client teams in rolling out processes and systems to gather and organize KPI metrics. By continuously monitoring, improving, revisiting, and reframing KPIs, our mining industry client has realized appreciable cost savings, deepened supplier relationships, and maximized procurement efficiencies.
