Procurement
• 8 min read
6 Procurement KPIs You Need to Track in 2024
27th December, 2023
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Monitoring procurement key performance indicators (KPIs) is integral to an IT procurement manager's role. These procurement KPIs offer valuable insights into the efficiency and effectiveness of procurement processes. They serve as benchmarks to evaluate supplier performance, identify areas for improvement, and drive cost savings while enhancing operational efficiency.
Procurement KPIs are crucial benchmarks for IT procurement managers, clearly showing process efficiency and effectiveness. These indicators serve not only as performance snapshots but also as early warning systems for potential challenges.
Understanding and monitoring these KPIs is essential for managers entrusted with sourcing pivotal technologies for business success. They offer actionable insights, aligning procurement strategies with organizational goals, whether aimed at cost savings, enhancing vendor performance, or mitigating risks. Ultimately, tracking these KPIs ensures continuous optimization of procurement strategies.
What are Procurement KPIs?
Procurement key performance indicators (KPIs) are a set of metrics aimed at assessing various aspects of the procurement process. Among these procurement KPIs, the 'Cost Savings Percentage' stands out as a fundamental KPI, focusing on evaluating the effectiveness of cost management during procurement activities. For instance, if an IT procurement manager successfully negotiates contracts, resulting in a 15% reduction in overall costs compared to the initially budgeted amount, the Cost Savings Percentage would reflect this achievement.
These procurement KPIs are typically measured across three key categories: cost, supplier, and operations. Tracking performance in these areas enables the enhancement of procurement efficiency and reduction of associated costs. Additionally, leveraging these KPIs when interfacing with the management team serves as a powerful tool to showcase performance and garner necessary support when required.
Benefits of Tracking Procurement KPIs
Tracking procurement KPIs offers several notable benefits that significantly impact the efficiency and strategic direction of an organization's procurement processes:
Improved Performance Monitoring: Regularly tracking procurement KPIs allows for effective performance monitoring, enabling the identification of trends and areas for improvement. This data-driven approach aids in making informed decisions to enhance overall procurement effectiveness.
Increased Transparency: Utilizing quantifiable data from KPI measurements provides a strategic reporting mechanism, fostering organizational transparency and accountability. This transparency enables clear and concise reporting of progress toward objectives.
Aligned Objectives: Procurement KPIs serve as a compass, aligning decision-making processes with the overarching goals and objectives of the organization. They help ensure that individual and team objectives align with broader organizational goals.
Enhanced Supplier Relationships: These KPIs are instrumental in evaluating supplier performance, thereby enabling teams to identify areas for improvement and strengthen relationships with key suppliers.
Increased Efficiency: Tracking procurement KPIs helps identify bottlenecks within the procurement process. With this insight, procurement teams can implement necessary improvements to enhance efficiency and streamline operations.
These benefits underscore the importance of tracking procurement KPIs. Here are six indispensable procurement KPIs that provide valuable insights into procurement performance, aiding in informed decision-making.
6 Procurement KPIs That Every Procurement Team Should Track
The below-mentioned procurement KPIs can help you monitor your team's progress, identify areas for improvement, and make data-driven decisions.
1. Cost Competitiveness (cost reduction & avoidance)
Cost Competitiveness, driven by cost reduction and avoidance metrics, is pivotal in assessing an organization's purchasing efficiency. This procurement KPI employs market data to benchmark category costs and ensures that spending remains competitive within the industry, fostering a strategy of paying less for goods and services.
Procurement cost reduction, a significant procurement KPI, measures the percentage of savings achieved through negotiations and discounts on each order. Tracking these savings over time provides insights into the effectiveness of cost management strategies. It involves comparing prior costs with current expenditures for similar products/services, facilitating enhanced supplier management, educating staff on cost-saving techniques, and bolstering supply chain efficiency. Additionally, it aids top management in devising long-term cost management plans.
On the other hand, cost avoidance focuses on preventing potential future expenses. While not directly measurable as an annual cost-saving KPI, it's crucial in avoiding additional costs. Unlike cost reduction, cost avoidance, considered a 'soft savings' KPI, might not have immediate quantifiable savings but contributes significantly to the organization's financial health.
Both metrics, despite their differences, hold strategic value. They are critical in enhancing profitability and competitiveness by optimizing procurement strategies and ensuring financial resilience.
2. Purchase order cycle time
The purchase order 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, time deliveries, invoice generation, and payment.
Moreover, where time-to-market is critical, optimizing this KPI ensures that you can swiftly adapt to technological changes without compromising efficiency.
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." Preferred 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.
3. Purchase order cost (cost per invoice)
This procurement 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 cost of purchase order 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.
4. Vendor availability & performance
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.
5. Supplier Compliance Rate
As a key performance indicator (KPI), suppliers' compliance rate or supplier defect 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).
Delivery time, 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.
6. Procurement ROI
Understanding the macro-metric of procurement return on investment (ROI) is paramount. It serves as a valuable compass, guiding organizations through the intricate landscape of procurement processes and shedding light on the effectiveness of their investments.
Procurement ROI, a pivotal KPI, delves into the nuanced dynamics of expenditure, evaluating the merit of each financial decision made by the procurement department. It goes beyond the mere act of spending, focusing on the tangible outcomes by scrutinizing whether the accrued savings outweigh the incurred expenses.
A positive procurement ROI signifies astute investments, affirming that the procurement process contributes significantly to financial health. Conversely, a negative result serves as a red flag, indicating potential financial hemorrhage within the department.
It's essential to note that Procurement ROI exclusively gauges hard savings and does not account for procurement cost avoidance. As such, its true potential is unlocked when complemented with other KPIs. This creates a comprehensive mosaic of the procurement department's performance of procurement process improvement.
Consider a scenario where a procurement professional implements cutting-edge procurement software. The initial investment in the software incurs a notable expense, but its integration streamlines processes enhances efficiency and negotiates favorable terms with suppliers. Over the course of a year, this leads to significant cost reductions, resulting in substantial annual savings.
Procurement investments, in this case, become a strategic tool to assess the success of the procurement software investment. The formula for calculating procurement ROI – annual savings from procurement divided by annual procurement costs – provides a concrete figure.
The positive outcome indicates a reasonable investment that aligns with the organization's financial objectives. Conversely, a negative result prompts a reassessment of the procurement strategy to pinpoint inefficiencies and areas for improvement.
Use "Zluri" As An Extension of Your Procurement Team
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.
Unlock unparalleled efficiency in your SaaS procurement and renewal tasks with Zuri, your dedicated partner in optimizing procurement KPIs. Zluri's SaaS buying service boasts a team of procurement experts committed to streamlining negotiations on your behalf. By entrusting Zluri with these responsibilities, you liberate your valuable resources for more strategic initiatives.
Let's see how.
Strategic Savings and Security
Zluri saves you time and secures your preferred SaaS applications at discounted rates. Our expertise ensures you receive the best deals available, providing time and cost savings.
In-depth insights for Informed Decisions
With access to data from over 1 billion SaaS transactions, Zluri offers unparalleled insights into pricing structures. Procurement managers can confidently make informed decisions, ensuring they pay the right price for essential software licenses, regardless of their geographical location.
In addition, Zluri's SaaS Buying Service is a game-changer for you seeking to tackle maverick spending effectively. By centralizing the efficient procurement process, enforcing procurement policies, and optimizing costs, Zluri empowers you to take control of your SaaS landscape.
Beyond Procurement - Optimizing Your SaaS Stack
Zluri's service extends beyond procurement, helping you optimize your SaaS stack. Zluri offers a SaaS management platform that helps to identify redundant or unused applications to maximize investments, eliminate shadow IT, and enhance overall spending efficiency.
Strategic Planning for the Future
Looking ahead? Zluri's procurement experts leverage data from our SaaS management platform and your purchase history to strategize your SaaS acquisitions for the next 12 months. Empower your departments to select the necessary tools while Zluri handles the rest.
Tailored Negotiations and Benchmark Data
Zluri negotiates on your behalf to secure the best SaaS deals tailored to your specific business goals and requirements. Our benchmark data ensures fair pricing, keeping your operations running smoothly.
For MoEngange, Zluri successfully reduced expenses by over $250k in just 5 months, showcasing the tangible impact of our procurement expertise.
Simplify and Streamline with Zluri
With Zluri, cost-cutting goes hand-in-hand with simplified SaaS management. Remove unused licenses and optimize your IT procurement process, making your job easier and your budget happier.
Let Zluri be your trusted partner in the realm of SaaS procurement. Book a demo with us today and experience a seamless journey towards achieving your procurement KPIs.
FAQs
What are the 5 key performance indicators for procurement?
As businesses conduct their evaluations, they're honing in on pivotal essential procurement KPIs crucial for propelling their operations, such as:
Contract Compliance Rates.
Cost Per Invoice.
Spend Under Management.
Invoice/Purchase Order Accuracy.
Procurement Cycle Time.
These procurement metrics serve as vital benchmarks guiding the trajectory of their enterprise, ensuring efficient and effective performance across various facets of their business processes.
What is the KPI in procurement?
KPIs in procurement are quantifiable metrics designed to evaluate and measure procurement processes' effectiveness, efficiency, and success. These indicators provide a clear and objective view of how well an organization meets its strategic procurement goals, ensuring that resources are allocated efficiently, risks are managed effectively, and optimized overall performance.
What are the purchasing KPI examples?
Examples of KPIs for purchasing department or procurement leaders:
Purchase Order Cycle Time: Measures the efficiency of the purchasing process by evaluating the time it takes to create and fulfill purchase orders. A shorter cycle time or period of time indicates streamlined operations.
Supplier On-Time Delivery: Assesses the reliability of suppliers in meeting delivery deadlines. High on-time delivery percentages indicate strong supplier performance/supplier lead time and reduced disruptions in the supply chain.
Purchase Price Variance (PPV): Measures the variance between the standard and actual purchase item costs. A lower PPV indicates effective cost control and accurate forecasting.
Spend Visibility: Determines the percentage of overall spend actively managed and monitored. Improved spend visibility enhances control over procurement costs and identifies potential areas for savings.
Supplier Quality Index: Evaluates the individual quality of products received from current suppliers, ensuring that purchased items meet or exceed specified standards. A higher supplier quality index reflects superior supplier performance management. This also improves the relationships with suppliers.
About the author
Tathagata is a Technical Content Writer with 4+ of experience in the SaaS industry. He has a keen eye for research and understanding macro trends in the SaaS & AI-based technology space. He has worked across several marketing & strategy roles in various domains like banking, e-commerce, and education sectors. In his leisure time, Tathagata is a full-time PC gamer.
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