KPIs or Key Performance Indicators is a measure of the performance of a task. It evaluates if the aspect is successful and how much. For every process in a business scenario is important to measure if what is being done is effective or not.
Procurement operations have its own necessities and procedures. So, it’s fundamental establishing adequate KPIs to make a strategy. They are also important to monitor and share progress in an objective way.
Firstly, you need to understand the process involved in procurement and, after that, set definitive aspects you need to measure. Let’s look at the process first.
Types of KPIs for Procurement
There are three major components in a procurement operation: suppliers, staff, and organization. Each one of these have specific KPIs that will indicate aspects that are concentrated in that action.
Supplier will need KPIs that can measure the quantity available, the time each one takes to deliver, how much the company is spending in the supplier and the risk involved with them.
On the other hand, staff concentrates more on the team and daily activities. For instance, the spend for employee, the contracts, the training of each one and the costs involved in security.
Finally, organizational will contemplate the whole process and company. So, it focuses on management spend, the inventory accuracy and the ratio of spending to sales, the revenue.
So, now that we have established the differences of each part of the process, we should seek for more specific KPIs.
Important KPIs for Procurement
Now that you have divided your operations you can think of measures that will validate actions in each one. We’ll list some of the most used KPIs on procurement and explain why they are important.
One of the most important is the procurement Return on Investment (ROI). That is, how much is the reduction in costs from procurement department compared to the cost of the procurement operation.
Linear Performance Pricing:
This will give you the proportion of purchases on procurement department and the percentage of suppliers under contract, since it will deal with the number of products lines invoiced that are out of the reference price.
Average Delivery Time
Knowing how long your order takes to get to your warehouse is a key factor because you can control your inventory, manage your order policies and even avoid losses and excessive stock.
Purchases Outside of Contract
Purchases outside the contract are those done not by procurement’s personnel. It’s important to measure if other departments are following procedures of order and the proportion of orders made outside contracts.
Duration of Ordering Process
Keeping track of the duration of the whole process will indicate what areas needs improvements and which are efficient. Then, it will be possible for management to invest resources on those areas.
Emergency Purchase Ratio
This KPI will measure the ratio of purchases that happen outside the order. They usually happen when there is a shortage of products. So, measuring this will help defining a better quantity for orders.
KPI is a good tool to evaluate efficiency and risks at business operations. They can help keep track of repetitive tasks and generate data for optimizing them.
Also, they help establishing a standardize process, preventing loses and maximizing performance throughout the operation. Often KPI will involve more than one team, so it’s a process for the whole company to integrate them at the process.
Finally, they are a great solution to identify areas that could improve and areas that are not performing well at all. More important, you need to set your KPIs accordingly to the needs of your company or else it won’t reflect reachable goals.