To achieve strategic procurement, it is important to assess the current performance and identify areas for growth. This journey begins with measuring key performance indicators (KPIs) related to procurement. In light of the current market volatility and financial uncertainty, evaluating acquisition practices today promises significant rewards in the future.
In this article, we discuss the top procurement metrics, their impact, types, and best practices for tracking.
Introduction to Procurement KPIs
Procurement Key Performance Indicators (KPIs) are measurable values that reflect the efficiency of purchasing processes. They provide insights into how well a company handles costs, time, and quality in procurement projects. KPIs can be compared to a strategy report card, showing where you excel and where you might need improvements.
Choosing the right KPIs is not a one-size-fits-all approach, but a tailored one. It means you should consider factors like the business size, operation model, budget allocations, and any rules and regulations your company follows. By picking KPIs that fit a unique setup, you can easily monitor the progress toward achieving business goals.
Importance of Measuring Procurement Metrics
Understanding and estimating procurement KPIs brings tangible benefits to your business:
- Alignment with Business Goals: KPIs should be relevant and based on the value dimensions that matter most to your business. For example, if a company's goal is increasing the range of products by two times in six months, indicators related to lead times and purchase order cycles should be a top priority.
- Continuous Improvement: Purchasing metrics act like a guide that brings trends, patterns, and concerns to the table. By monitoring them regularly, procurement teams identify where to put their most effort into.
- Risk Management: Remember the old saying "forewarned is forearmed"? This is where indicators like supplier availability, defect rates, and PO accuracy are the tools to avoid supply chain disruptions.
- Strategic Decision-Making: KPIs are unbiased figures that reflect procurement performance. They are the basis for CPOs to make proactive decisions and drive better outcomes.
Now, let's take a closer look at the essential categories of procurement KPIs.
Types of Procurement KPIs
There are over 200 procurement metrics, and each procurement function should find its own custom set of KPIs.
In this guide, we have compiled a list of the most significant purchasing metrics, classified into the following groups:
- Cost Saving KPIs: Cost Reduction, Cost Avoidance, Procurement ROI
- Quality KPIs: Defect Rate, PO Accuracy
- Lead Time or Delivery KPIs: Lead Time, PO Cycle Time
- Supplier KPIs: Number of Suppliers, Supplier Availability, Supplier Spend Allocation
- Organizational KPIs: Spend Under Management, Emergency PO Ratio
#1 Cost Perspective KPIs
Cost Reduction
This KPI measures the decrease in expenses due to price changes for specific goods and services.
It has an immediate impact on the profit and loss and can have different reasons, such as price (re-)negotiation, supplier switches, economies of scale from quantity discounts, and more. Overall, it reflects the ability of a procurement team to reduce costs and refine spending.
How to calculate: Cost Reduction (%) = (Current Unit Price − Previous Unit Price) / Previous Unit Price × 100
Cost Avoidance
Procurement cost avoidance is a way to prevent unnecessary expenses caused by inflation, economic changes, or rising prices. Unlike cost reduction, which directly affects the bottom line, this is a so-called soft KPI that looks to future strategic spending.
It assesses the effectiveness of measures taken to avoid extra costs without compromising purchasing quality. Such actions may include sourcing better supplies or negotiating long-term contracts with fixed prices.
How to calculate: Cost Avoidance (Amount) = Estimated Cost of Inaction − Cost of Proactive Solution
Procurement ROI
The ROI is a commonly used financial metric applied to procurement whenever investment decisions are to be made.
It provides a clear view of procurement department profitability and is also used to evaluate the benefit of implementing eProcurement software solutions.
When measuring purchasing ROI, consider hard savings, not cost avoidance.
How to calculate: Procurement ROI (%) = (Realized Annual Cost Savings / Total Annual Procurement Costs) × 100
#2 Quality Perspective KPIs
Defect Rate
This is a metric for measuring the percentage of defective products received from a particular supplier.
A high defect rate may indicate issues with supplier quality, poor supplier performance, or inadequate quality control measures.
This KPI is critical for industries like automotive and hi-tech, where maintaining high-quality standards is paramount.
How to calculate: Defect Rate (%) = (Amount of Defective Products / Total Amount of Products Inspected) × 100
Purchase Order Accuracy
Purchase order accuracy refers to the frequency with which POs align with the items ordered from vendors.
High accuracy rates mean that your vendor interaction is on track. However, multiple inaccurate POs lead to delays, product shortages, and increasing operating costs. These errors require extra time to fix and may indicate that supplier relationship management activities need careful attention.
How to calculate: PO Accuracy Rate (%) = (POs with Errors per line item/quantity/pricing / Total Number of POs) × 100
#3 Lead Time Perspective KPIs
Supplier Lead Time
By tracking this KPI you get an insight into the time it takes for a supplier to deliver goods after receiving a PO.
Lead time reflects the supply chain efficiency and trustworthiness of company vendors. The metric is typically measured in days, where shorter lead times mean faster delivery and, as a result, happier customers.
How to calculate: Supplier Lead Time (Days) = Delivery Date - PO Acceptance Date
Purchase Order Cycle Time
PO cycle time tracks the time taken to complete the entire purchasing process, from PO placement to final payments and receipts.
This procurement KPI is measured in hours or days and offers valuable insights into the efficiency of the procurement process. It is extra helpful in categorizing vendors and identifying top performers for urgent needs.
How to calculate: Purchase Order Cycle Time (Hours/Days) = (Order Date - Delivery Date) / Total Number of Orders Shipped
#4 Supplier Perspective KPIs
Total Number of Suppliers
This procurement KPI provides statistics on the supplier diversity and stability of the supply chain network.
This metric reflects a company's ability to source products and services from multiple vendors. By monitoring the supplier base, you can evaluate fluctuations in their numbers and strategize to ensure a flexible balance.
How to track: Split your active supplier pool based on service/goods/projects and keep track of their numbers within a specified period.
Supplier Availability
Vendor availability refers to how quickly suppliers respond to unexpected demands and fulfill orders on short notice.
Suppliers having the highest availability are the most reliable and prepared to address critical needs. For a smooth supply chain, maximum efficiency, and minimal risk of disruptions, it is recommended to keep supplier availability at around 90%.
How to calculate: Supplier Availability (%) = (Items Available on Supplier's Side / Total Number of POs) × 100
Supplier Spend Allocation
This procurement KPI provides the percentage of total purchasing spend allocated to each supplier.
This metric helps spot strategic suppliers as well as understand the overreliance on a few vendors. By keeping tabs on this indicator, procurement professionals optimize procurement spending, improve supplier relationships, and reduce risks by diversifying the supply base.
How to calculate:
a) Spend by Supplier (USD) = Spend With a Particular Supplier - Total Spend
b) Spend by Supplier (%) = (Spend With a Particular Supplier / Total Spend) × 100
#5 Organizational Perspective KPIs
Spend under Management
Spend under management refers to expenses actively managed and approved by stakeholders.
This KPI weighs the portion of total spend under control and helps find bottlenecks in spend management practices. A higher SUM percentage means a company can forecast future expenses more effectively and minimize unapproved or maverick spending.
How to calculate: SUM (%) = (Spend Approved / Total Spend) × 100
Emergency Purchase Ratio
This metric refers to the percentage of unplanned purchases compared to the total number of ones made.
Although some urgent orders are unavoidable, high emergency purchase ratios may indicate poor planning, lack of inventory management, or inefficient supplier relationships. By continuously reducing this indicator, companies make their acquisition processes more robust and consistent.
How to calculate: Emergency Purchases (%) = (Emergency POs / Total Number of POs) × 100
Steps to Establish & Track Essential Procurement KPIs
Setting up and monitoring procurement KPIs involves a few key steps to ensure that your organization is on the right track:
Set SMART Goals for Each KPI
Get specific with your procurement goals. Ensure your KPIs are Specific, Measurable, Achievable, Relevant, and Time-bound. It will help the purchasing department to remain focused and ensure your processes are optimized to reach the right targets.
Tune Data Collection Workflows
Get your processes straightforward. Determine what data you need to collect for each KPI, and decide on a method, timeframe, and stakeholders for tracking them. The key is to make KPI monitoring a regular activity, so you stay on top of positive and negative changes.
Use Technology for Accurate KPI Analysis
Opt for procurement software that'll enable you to crunch numbers faster and smarter. Instead of spending hours organizing data in spreadsheets, invest in tools that automate data analysis and reporting.
Team Procure is a game-changing solution that relieves the burden of manual KPI tracking. Our platform centralizes all critical data into a single workspace, including PO volumes, vendor performance, budgets, and expenses.
With real-time data visibility and customizable historical reports we provide, procurement teams always stay in the loop and save money in the long run.
Boost Your Procurement Efficiency
Key performance indicators in procurement provide actionable insights into cost savings, supplier management, and overall purchasing performance. By setting tailored metrics and observing them regularly, organizations enhance procurement management and invest in their long-term success.
Ready to upgrade your purchasing strategy? Schedule a live demo with Team Procure, get a 14-day trial access, and see firsthand how our system helps make data-based decisions.
