The markets are ever getting sophisticated and complicated with every passing day. The Covid-19 has aggressively affected competitiveness. The procurement departments are under stress to meet expectations as regards delivery and cost-saving. The companies are always searching the avenues for improvements to ensure efficient procurement. Making the procurement process sustainable and responsive to the fast-changing supply chain phenomenon is a challenge for procurement teams.
The challenge can only be met by keeping in place the relevant data and metrics. Tracking key performance indicators (KPIs) is of utmost importance in procurement. The data and information are different for companies and industries but some common points shape the fundamental procurement KPIs irrespective of industry.
Monitoring Procurement KPI Metrics
KPIs serve as a basic factor for studying the trend of a procurement process. The KPIs are tools to measure the efficiency of the procurement process and procedure of a company. KPIs serve as verifiable metrics for management to understand and control purchasing patterns. The metrics help in identifying areas for improvement, costs, time-saving, and to achieve ultimate business goals. Following are some basic procurement KPIs that a procurement team must take into account.
Access to Supplier
Access to supplier or vendor availability is a measure that ensures the availability of suppliers to meet an emergency demand. This procurement KPI helps businesses to understand and check the reliability of a supplier. A company can not set a procurement plan if the reliability of its supplier is not beyond doubt. This KPI can be obtained from the number of orders placed with a supplier and the number of actual supplies made by the supplier. The number of failures or partial supplies can determine the default ratio. The unreliable suppliers are filtered on reliability metrics.
Compliance ratio stands for conformity with legal requirements governing agreement between both parties. The procurement agreement is always subject to complications if not meeting certain legal requirements. The successful performance remains questionable if legal terms are not properly addressed. Meeting all the statutory and legal terms and conditions is always an essential requirement. Compliance ratio KPI shows the strength and level of meeting legal requirements in a procurement agreement.
Cost Per Purchase
This procurement KPI refers to the average cost of processing an order from start to invoice closure. The cost per purchase varies from organization to organization and even department to department in the same organization. Various factors determine the level and nature of variance. The companies having manual systems of procurement occur more cost on processing orders than the companies having automated procurement process. The place of production, the distance between supplier and receiver, and the handling of a product are some other aspects that count towards the cost per purchase.
The Term refers to the time taken by the supplier from placement of order to completion of shipment. Lead time is normally measured in days. Suppliers know this time based on their experience with the production cycle of a product and the delivery time between the shipment ad delivery places. The KPI typically is helpful for the company to accurately know when the product will be delivered to its warehouse. It is a tool for planning, scheduling, and commissioning purchase orders.
Purchase Order Time Cycle
The ROI is measured in terms of hours or days. It involves the time of issuing a purchase order and its transmitting to the vendor or supplier. The processing of a purchase order between a company and its vendor is termed a purchase order cycle. It is an important KPI in the case of automated businesses that rely on system queued order processing.
The internal analysis for measuring the performance of the procurement department is called procurement ROI. It helps in monitoring the ROI of a procurement department. The tool helps in making the department more effective and efficient if needed. It is a useful KPI for ascertaining the annual procurement cost-saving. The analysis provided data for planning and reforming the procurement process.
Purchase Order Accuracy
Purchase order accuracy means that each order is placed and performed accurately without undue delay and product issues. A Low purchase order (PO) accuracy can increase operating costs. The KPI is helpful for a business to know if goods are smoothly delivering according to the terms of the procurement agreement. A Purchase order accuracy is measured by tracking the delivery of goods. It involves quality and compliance to goods specification and timely delivery. The number of faulty deliveries disturbs the ratio that affects the procurement costs.
Vendor Defect Rate
It is a measure of evaluating the quality of the products received from suppliers. The supplier sending defective goods is followed up for improvement. A supplier repeating the mistakes must be replaced to avoid losses. The KPI is measured by the percentage of products not meeting the required specifications or quality standards. Tracking suppliers can help in separating the reliable suppliers from the lot that need action for improvement.