Key Performance Indicators are management tools that help meet strategic and operational goals and monitor Procurement Department performance. Establishing KPIs is an activity performed with the client because Procurement KPIs have to be aligned with the client’s strategies and objectives set for the future.
Setting KPIs will have a positive impact on focusing everyone on the goal. There is a simple principle which says that ‘what gets measured, gets managed’, so setting key business drivers as KPIs, the client assures that they will get managed and that he will review progress. Employees can be motivated by providing them the opportunity of achieving a small victory. Information of how KPIs are measured should be public to every stakeholder.
Having KPIs on cost savings can determine a negative impact on quality, it should have in mind an attention on balancing between quality, delivery and cost savings. Very importantly, KPIs should not be in conflict with Procurement Policy or ethical principles.
KPIs below are presented as examples. There is no unique formula for success, goals and KPIs are going to be customized on every client.
Cost reduction savings
Cost reduction implies savings that are realized by reducing the cost of same goods/ services purchased as compared to the previous prices paid. This indicator will be calculated as a percentage of total spend compared to previous year and then it should be compared against the industry average of cost reduction savings.
Cost avoidance represents cost reduction that results from a spend that is lower than the spent that would have otherwise been required if the cost avoidance exercise had not been undertaken. All avoidances should be registered in order to monitor this KPI. Examples of good negotiation skills which implies cost avoidance which are not measured in the Cost reduction savings KPI: delaying a supplier’s price increase, trainings at no cost, negotiated savings that have actually been realized and implemented by the organization, etc.
Standard bid procedures
Following the standard tender procedures described in the Policy can help improve the quality of products or services and decrease costs. This metrics is calculated through the number of purchases that comply with this Policy over the total purchases. The aim is to increase this rate.
Another method of calculation is through the money spent by the Procurement Department on buying products and services for company divided by total spend, all multiplied by 100.
Percentage of green bid procedures
For companies that assumes a mission in promoting and implementing a greener way of doing business, the number of green bid procedures should be monitored.
Percentage of suppliers accounting 80% of spend
A monopoly of few suppliers may lead to lower quality over the long run. Also, a large number of suppliers have a negative impact on time and resources which implies higher costs. First, an analysis should be made in order to identify and eliminate situations like buying the same products, sub-category or category of products from different vendors or too many vendors.
Then, Procurement Department will have to find the balance area. On one hand, it will focus on increasing competition, on the other hand, it will generate and maintain strategic relationship with key suppliers. On an average an organization will spend 80% of its money with only 6% of suppliers.
This indicator will measure Procurement Department’s ability to satisfy its internal customers regarding the quality of supplier and the quality of products delivered/ services provided. It can be quantified from the feedback form that end-users will complete after the contract is implemented and rate the supplier. Regarding products delivered/ services provided, the Procurement Department can be evaluated on how it followed the end-users recommendations or resolved complaints (only if these are reasonable and can be executed).
Reduction of inventory
Inventory should be coordinated and controlled. There should be set a minimal and maximal stock resources for each article. Having stock below the minimal quantity can harm continuity and above the maximum adds expenses for inventory management and blocks the money. Having set a strategic supply inventory will reduce inventory and low financing on inventory, improve work capital, have more free space for other products and improve supply continuity.
For industries in food, chemical or IT area, improving product expiration rates can be a key business driver.
Purchase Order processing cost
The average Purchase Order processing cost should be determined in order not to issue too many orders for an item that costs less than this processing cost because it will result in a loss and waste of resources.
Errors in purchase orders
Accuracy in issuing and processing purchase orders is important because the lack of it will increase operational costs. This indicator will measure the number of errors over total number of purchase orders and the goal is to decrease the percent of errors.
Percentage of rejections
Low quality may affect product quality and increase organizational costs. The goal is to lower the percentage of rejections.
On-time supplier delivery rate
The number of orders received from suppliers on or before the committed delivery date divided by the total number of orders received from suppliers over the same period of time, as a percentage.
Capacity of Procurement Team
The Procurement Team should be properly organized. The number of members with responsibilities in procurement and supply management varies depending on industry (for example: in petroleum industry, the number of employees in procurement and supply management represents 3.6% from the total number of employees in a company, in aerospace & defense 3.2%, in engineering & construction 2.9%, in utilities 2.0% and in financial services 0.4% ).
Another way of dimensioning the team members’ number is by comparing the managed spend per supply management employee with the client’s industry (in financial services – an employee manage $25.4 mil., in petroleum - $24.9 mil., in utilities - $18.7 mil., in industrial manufacturing – $14.1 mil., in aerospace & defense $7.3 mil., in engineering & construction – $6.6 mil.1).
Professional development of Procurement team
Procurers should be up-to-date with legislative changes, innovative ideas in improving procurement, they should be encourage to obtain professional certifications if these are necessary to the client, they should be experts in the relevant industry. This indicator can be quantified as percentage of certified team members, number of trainings per team member, number of participations at relevant events.
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