These days it’s not enough for procurement teams to provide cost savings. Business leaders are increasingly demanding that procurement teams provide more value in addition to cost savings, which is why many of them have a multitude of performance measurement tools, otherwise known as key performance indicators (KPI).
Former England Rugby Union Manager, Clive Woodward famously said“concentrate on measuring performance and winning will take care of itself” and we concur. Measuring performance allows us to assess, inspire, promote, control, develop and improve. Put simply, it should be at the heart of every business. Performance is measured ultimately because managers want to see how much procurement is contributing to the success of a business, and whether or not it is contributing to certain failings of the business. Once these areas are identified, KPIs can be placed to ensure success moving forward. Below, we will discuss some of our top 5 KPIs that you should be tracking in your business.
It’ll come as no surprise to most that the bottom line is the most important KPI to measure. The financial savings or cost savings are inclusive of both discounts and savings that have been accomplished based on the agreed-upon figure. The more savings you make, the more you’re able to please both senior management and finance and accounting teams. In order to do this, you’ll need to ensure you’re getting the best prices by either swapping suppliers and/or ensuring that the suppliers you do have provide the best value to the business. Of course, you must consider all elements of these savings which would include elements that can contribute to the cost of ownership such as logistics, supplier management and life cycle costs. And you’ll need to also include potential cost increases that are unavoidable like fuel, energy and inflation to get a true reflection of your financial savings.
It’s incredibly important to leverage the supplier performance as much as possible.Supplier performance is a KPI which has many facets to it and could quite easily be exclusive KPIs in themselves. With this KPI we can monitor whether our suppliers are consistently supplying products, raw materials and services that are below par. If the products or services are below par consistently, we can take corrective action. The quality of suppliers can include a multitude of different elements, but the main two that supplier performance encompasses, and the ones we believe to be the most important in our experience are SupplierAvailability and Supplier defect rate.
• Supplier Availability – The business world is a volatile place with markets and demand ever increasing and decreasing at will; that’s why it’s so important for you to have a supplier you can rely on who is able to provide their goods and services flexibly during these volatile and unpredictable occasions. This KPI allows us to measure their response during crucial requests and judges how reliable they are. A simple equation to measure the availability of your suppliers is to divide the number of times products/services were available by the total number of requests placed for said products/services. In our experience, anything lower than 92% is sub-par.
• Supplier Defect Rate - ThisKPI allows us to monitor the supplier’s product or service quality. Combining this metric with supplier availability can give us a real picture of a supplier’s overall performance score, because supplier availability is meaningless if all of the supplies are damaged. Certain industries will need to place the defect rate under a large level of scrutiny compared to others, so the percentage you’re looking for really depends on what type of business you are running. To understand your defect rate, you’ll need to divide the total number of defected products or services by the total number of times the product or service was inspected for defects.
Your lead time is the amount of time it takes to complete a process from start to finish.The old adage of “time is money” certainly rings true, which is why lead time is such an important KPI to monitor. If it takes a long time for you to fulfil an order, then it can cost the business time and money. In procurement, you’ll be judged on the lead time – starting at the act of purchasing and finishing at the collection of the product within the system. However, an important note about lead time is that it must not come at the detriment of quality, which is why we have placed it third in our list. In order to calculate your lead time, you’ll need to deduct your purchase order acceptance time from your delivery time.
In our experience this can be an undervalued KPI, but also one that when looked at closely can provide some quick wins. This allows you to understand how many suppliers you depend on. If there are lots of suppliers with small orders then you may not be getting a good deal. Of course, the counterargument to this is that some businesses don’t like to put all of their eggs in one basket, but providing that the supplier performance KPI is being met, then this shouldn’t be a problem.
Ultimately, we need to understand whether the procurement optimisation efforts are delivering a decent ROI. If both the investment in time and money to optimise the procurement department doesn’t deliver large cost savings/avoidance then it is time to rethink these investments.