30th March, 2023
TABLE OF CONTENTS
As a procurement manager, you can set KPIs to measure your team's performance. Besides, you can use these KPIs to improve your procurement strategy.
As a procurement manager, you should track these 6 KPIs to understand your software purchase process better.
Procurement key performance indicators (KPIs) are crucial as they provide valuable insights into the effectiveness and efficiency of a company's procurement processes. By monitoring these KPIs, you can track their progress and identify improvement areas, resulting in cost savings, increased operational efficiency, and improved supplier performance.
You can measure KPIs under three grounds, cost, supplier, and operations. By tracking your performance in these three areas, you will be able to increase the efficiency of the procurement process and reduce the costs involved. Along with enhancing efficiency, you can use these KPIs with your management team to show your performance s and get necessary support wherever required.
Following are some other benefits of tracking procurement KPIs.
Improved performance monitoring: By tracking procurement KPIs, it will be easier for you to monitor the performance eventually and identify areas for improvement. You can identify trends and make informed decisions by monitoring the performance regularly.
Increased transparency: By stating the quantifiable data from KPI measurements, you can report their progress strategically, leading to their organizations, which increases transparency and accountability.
Aligned objectives: By tracking KPIs, you can ensure that your decisions align with organizational overall goals and objectives. Hence, it helps you to align individual and team objectives with overall organizational goals.
Enhanced supplier relationships: Procurement KPIs can help teams evaluate supplier performance. You can improve or strengthen relationships with key suppliers by understanding the gaps.
Increased efficiency: By tracking procurement KPIs, procurement teams can identify bottlenecks in the procurement process and make necessary improvements to increase efficiency.
The above benefits state the importance of tracking KPI metrics.
Here are the 6 must-have metrics that will give you valuable insights into your procurement performance and help you make informed decisions.
The below-mentioned KPIs can help you monitor your team's progress, identify areas for improvement, and make data-driven decisions.
Cost competitiveness uses market data to benchmark costs by category and compares your company's spending with the industry's average. This metric helps you understand how the market is doing and ensures your organization is paying less for goods and services.
We know your team, and you always look for ways to reduce costs and streamline the process, and that's where the procurement cost reduction metric helps. It is a key performance indicator that helps you do that!
It measures the percentage of cost savings achieved on each order through price negotiations. And by tracking the cost savings generated through negotiations and discounts over time, you can see how effective your cost management measures are.
Now, let's talk about the two most important metrics on which Cost Competitiveness depends, i.e., cost reduction & cost avoidance.
Measuring procurement cost reduction involves comparing prior costs to new costs for the same products/services.
Cost reduction allows you to improve supplier management, educate employees on cost-saving techniques, and boost efficiency through supply chain analytics. It also helps the top management to build a comprehensive long-term cost management plan.
On the other hand, the cost avoidance metric assists you in preventing future additional costs. Unlike procurement cost reduction, which is considered a "hard savings" KPI and quantifiable in cost management strategies, the cost avoidance is referred to as a "soft savings" KPI and may not have a directly measurable effect on cost savings but still has a positive impact.
Both of these metrics add a lot of strategic value and hence are critical for your organization to increase its profitability and competitiveness.
The purchase order (PO) cycle time is the duration from submitting a purchase requisition to transferring it to a supplier or contractor. This key performance indicator encompasses the totality of the purchase order cycle, including order creation, approval, delivery, invoice generation, and payment.
It allows for the identification of suppliers who are capable of responding to urgent orders. Furthermore, suppliers may be categorized into different groups based on the cycle time value.
For instance, suppliers with a PO cycle time of 4 days or less may be classified as "short," while a cycle time ranging from 5 to 8 days may be classified as "medium." Suppliers with a cycle time exceeding 8 days may be categorized as "long."
Choosing a short PO cycle time vendor is advisable for urgent orders. Reducing the PO cycle time can lead to improvements in the overall cost and productivity of the procurement function and staff productivity.
This KPI measures how much it costs to process a purchase order from when it is made until the invoice is paid. When calculating this metric, there is no one-size-fits-all rule because the factors that affect the processing cost vary from company to company based on their size and industry. Therefore, the average processing cost is calculated differently by each company.
Also, this metric mainly comprises the total time spent and the number of staff members directly or indirectly involved in each step. This is why companies that process purchase orders manually have higher average costs than companies that have made the whole process automatic. Therefore, you can improve the efficiency of the procure-to-pay cycle by tracking purchase orders' expenses. It will lead to fewer mistakes and lower costs.
Vendor availability and performance are necessary to track if you want a successful procurement process in your organization. This procurement KPI measures how quickly the supplier can meet urgent needs. In addition, this key performance indicator (KPI) helps you determine a vendor's reliability.
When evaluating vendors, looking at more than just their contract compliance is essential. While the primary goal of the procedure is to provide vendors with constructive criticism, it is also frequently used as a significant statistic in the procurement process.
Identifying underperforming vendors and establishing benchmarks for future success with a standardized method of assessing customer satisfaction with vendor performance is possible.
When it comes to finding vendors, it's helpful to know which ones can be counted on in a pinch. This way, you can call on those vendors when you need to make quick purchases. In addition, you can find out using the right KPI to keep track of supplier availability. This will ensure that you can reach out to the right vendor when you next have an urgent need.
Vendor availability is calculated as follows:
Vendor Availability= number of times a vendor met an emergency purchase request/ total number of requests.
As a key performance indicator (KPI), suppliers' compliance rate with business requirements is useful in gauging their overall performance. The foundation of the procurement process is the contract between the company and its suppliers (buyer).
Time of delivery, special discounts, maximum response times to problems or delays, accepted payment methods, etc., are all spelled out in detail. When the compliance rate KPI decreases, unexpected costs like indirect procurement and maverick expenditure rise.
The compliance rate KPI gives information about how suppliers work together and helps negotiate with suppliers to save money.
The ratio of disputed invoices to the total number of invoices for that supplier and the difference between the price paid and the price quoted are the metrics that go into this KPI. When you work with Certified suppliers, the compliance metric increases greatly because they better understand processes and work methods.
Tracking procurement ROI as a macro-metric can give you useful information about how well the procurement department is generating returns. It is about how well your procurement process saves money and what is the return on investment (ROI) for buying things.
This KPI looks at how much money is being spent and if it is worth it by checking if savings offset the expenses. A positive result means the investments were good, while a negative result means the department is losing money. This KPI only measures hard savings and not cost avoidance, so it's best to use it with other KPIs to get a full picture of the department's performance.
Procurement ROI can be calculated as Annual savings from procurement/annual procurement costs.
If you're looking to evaluate the success of your procurement efforts, tracking these 6 procurement Key Performance Indicators (KPIs) is a great place to start. By closely monitoring these KPIs, you'll see how your procurement efforts are paying off and justify your organization's investment in procurement.
If you think staying on top of all these KPIs is a lot of work, let me tell you that's not the case. With the right procurement solution in place, many of the processes can be automated. One such solution is Zluri- an AI-Powered SaaS management platform that makes understanding your SaaS ecosystem easy and gives you real-time insights to make informed decisions during procurement. In addition, it will help you learn more about your SaaS environment and negotiate for the right tools during procurement.
At Zluri, we leverage our expertise and 1 billion data points on SaaS transactions to provide valuable insights into the average prices customers pay for SaaS applications. We also have knowledge of the optimal pricing for procuring SaaS licenses in different regions.
We use our benchmark data on SaaS prices to deliver data-driven insights and ensure you receive the best possible pricing for the SaaS applications you need. This helps keep your business moving forward.
Zluri's negotiation prices consider various factors related to your company's requirements, such as the desired license tier and the number of employees. We deeply understand each software product category and the associated pricing, and our experts use this knowledge to help you get better pricing. By modularizing pricing based on our data, we ensure you get the best value for your investment.
As a procurement partner, we go beyond outsourcing to act as an extension of your procurement team. We work closely with customers to build trust and ensure transparency throughout the purchasing process. By communicating with vendors on behalf of our customers, we can negotiate favorable deals. Additionally, by using our customer's email for all procurement, we bring transparency to the SaaS buying process.
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