Performance tracking is key to the success of any business process. As the legendary consultant Peter Drucker once said, ‘what gets measured gets managed’, and improvement relies on knowing where you are and where you want to get to. But how do you know what to track?
What’s more, oversimplified metrics carry their own dangers. Focusing too hard on one number can lead to a blinkered approach, where hidden vulnerabilities increase the risk to the overall operation.
Net profit is often seen as an all-encompassing ‘north star’ metric as it gets to the heart of what procurement is ultimately about – helping the business to run better, but even this has drawbacks. After all, capex-focused companies like Amazon can run for years without making substantial profits. KPIs are not one-size-fits-all. Clearly a more holistic approach is needed. ‘North star’ metrics are useful to focus the mind on the big picture, but having a number of KPIs to track performance makes it easier to identify where problems are happening in the system so they can be resolved quicker.
The three types of procurement KPI
We view procurement KPIs as fitting into three main buckets: Delivery, Cost-saving and Quality. Delivery is process-focused, drilling down on how effectively teams can deliver projects, as well as how many they can handle. Cost-saving is self-explanatory, encompassing all the conventional metrics for assessing return-on-investment. And quality focuses on mitigation of legal or regulatory risks, and helps to assess the calibre of your company’s suppliers.
Average time to project completion – Previous period average
Procurement velocity is the total time taken from engagement of procurement to project completion. We regard it as one of the ‘purest’ delivery metrics, as it gives a picture of the entire process as a whole. Of course, it can also be useful to track the time spent on each individual step for increased granularity and a better picture of where improvements can be made.
Projects completed are the output of the overall team. While it is a relatively simple number – simply the number of projects finished in a given time period – it is an invaluable sense check for the overall process. Ultimately, if these don’t feed through into the number of projects completed then something is going wrong somewhere in the process.
Spend under management (SUM)
SUM = Total approved spend (direct, indirect and service-related cost) – maverick spend
SUM is the percentage of spend controlled by management. A higher SUM usually makes it easier to optimise costs and forecast expense increases.
ROI = Annual cost savings/ annual procurement cost
Procurement ROI is often viewed as the most important of all KPIs, but overreliance on it can obscure the need to invest in improvements. We suggest using it alongside cost avoidance metrics for a more holistic picture.
Average payment terms
This is the average time it takes to pay creditors. This can vary widely company by company, so payment terms should match those of suppliers and customers to reduce risk. In some cases, fast payment terms can be used to secure preferential pricing or access from suppliers.
One great way to measure a team’s effectiveness is to track the satisfaction of the stakeholders they engage with. This can be done with a simple anonymous survey like a seven-point Likert scale. When assessing satisfaction, try to ascertain both the level of rapport stakeholders feel with their procurement teams and their satisfaction levels with the team’s procedures and involvement. Of course, good procurement processes occasionally requires speaking truth to power, so satisfaction should only be viewed alongside more concrete metrics for a holistic picture.
Number of suppliers
A classic indicator of resilience. Aligning closely with a small number of suppliers can lead to great improvements in project efficiency, but it also exacerbates supply chain risk. Efficiency cannot come at the expense of resilience. Ensuring a robust availability of supply is key.
Ultimately, a one-size-fits-all approach suits nobody. But whether you are focused on risk management in procurement, see it as a source of innovation and growth, or see it solely as a means of managing cost, clearly defined KPIs are the key to building the most productive and robust processes possible. Whatever your procurement priorities, having a clearly defined idea of what to do (and what not to do) is key to achieving your goals. Our platform lets you easily track all the metrics that matter to you, maximising your success no matter what it looks like. If you would like to find out more, click here.
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