How Do You Compare Procurement Performance?
To know how well your organization is performing, you need numeric baselines or points of comparison. The baseline can be your prior years' performance, but it is most helpful if you use the same key performance indicators (KPIs) as other organizations you benchmark.
The first five procurement KPIs focus on financial measures. But focusing only on money can lead to operational disruptions, which of course leads to lost money. Procurement KPIs 6 through 10 focus more heavily on operational performance.
- Cost Savings. This is the aggregate amount of money you've saved by reducing costs from one year to the next. This KPI measures the procurement department's lump sum contribution to the financial success of the organization.
- Managed Spend as a Percentage of Total Spend. Total Spend is the amount of money your organization spends externally on products and services each year excluding salaries. This KPI measures the degree of trust that management places in the procurement department's capabilities.
- Cost Savings as a Percentage of Managed Spend. This KPI measures how effective the procurement department is with responsibilities it has been given.
- Procurement Operating Costs as a Percentage of Managed Spend. Procurement operating costs represent the costs the organization incurs for having a procurement department. This KPI measures the procurement department's cost efficiency.
- Return on Investment. To calculate return on investment, you must first calculate your "return." In other words, by how much does your cost savings exceed your operating costs? Then, divide that number by the operating costs to determine return on investment. This KPI measures the procurement department's cost effectiveness.
- Percent of On-Time Supplier Deliveries. This KPI measures how well the procurement department gets what the organization needs when it needs it.
- Supplier Defect Rate. Supplier defect rate can be calculated by dividing number of defective items by the total number of items purchased (or the number of shipments with defects by the total number of shipments). This KPI measures the quality of purchases made by the procurement department.
- Customer Satisfaction. Asking internal customers to rate their degree of satisfaction with Procurement's performance or to indicate whether or not they are satisfied can reveal valuable information. When multiple organizations use the same question, benchmarking satisfaction levels is possible. This KPI measures the procurement department's ability to satisfy its internal customers.
- Procurement Cycle Time. The average time it takes between requisition submission and purchase order placement is one measure of procurement cycle time. Another type of procurement cycle time that can be measured is the time it takes from the beginning of a sourcing process to the time that a contract is signed. This KPI measures the procurement department's productivity.
- Value of Supplier Idea Implementation. Advanced procurement organizations actively solicit ideas from suppliers for cost savings, revenue growth, and the like. They track these ideas and measure the contribution to the organization's bottom line. This type of collaboration is advanced by today's standards but is becoming more common. This KPI measures how well the procurement department leverages the intellect in the supply base.
Adapted from: 10 Procurement KPI's, Parts I and II http://bit.ly/a07IJK http://bit.ly/bI7iWN