Definition of procurement KPIs
Key performance indicators (KPIs) are measurements of the efficacy of a business department, process, or strategy. They are essential to measuring the costs and reliability of a business strategy, as well as the performance and results.
“Tracking” a KPI refers to the continuous monitoring of its changes for the purposes of future planning. Procurement KPIs continually measure the progress of all things related to buying and obtaining goods and services necessary for a business’ operation.
Importance of procurement KPIs
Procurement has evolved over the years from transactional functions (now associated with purchasing) to encompass strategic activities focused on maximizing and creating value for a business. The success of these activities directly affects vendor relationships, customer satisfaction, and revenue.
Monitoring procurement KPIs is a vital part of keeping track of an organization’s overall health and the smaller endeavors that contribute to that.
22 KPIs every procurement team should track
As procurement has evolved so has the work of procurement teams, and especially so in recent years. Effective modern procurement requires end-to-end process tracking to both view and control the costs, sourcing, quality, and delivery times associated with acquired goods and services.
While businesses set objectives and monitor associated KPIs depending on the industries they serve, procurement departments across many industries strive for the same goals.
To help you meet yours, we’ve compiled a list of 22 essential procurement KPIs that fall into three business categories: suppliers, staff, and operational.
Suppliers, by definition, comprise a crucial link in your supply chain. Tracking the latest supplier data is an easy way to maintain good relationships with great suppliers (discounts, anyone?) and allows you plenty of time to find replacement suppliers should the quality or lead times of existing ones diminish. Monitor the following essential supplier KPIs to stay informed on performance, compliance, and pricing.
1. Number of suppliers
The number of suppliers carries more weight than you might think. Buyers that don’t use enough suppliers make themselves vulnerable to dependency on one for certain goods or services. This constitutes a high risk for shortages and bottlenecks; potential customers will take notice as was recently shown with the most recent supply chain disruptions. After all, your shortages are their problem, as well.
Too many suppliers, on the other hand, can be a financial detriment, as it significantly lowers the chances for discounts and successful price negotiations. In addition, consider the bandwidth of your procurement and accounts payable department. Do they have the time and resources to continually monitor, process, and audit large numbers of suppliers? A streamlined, efficient procurement strategy will prevent your approved supplier list (ASL) from growing unwieldy.
2. Supplier diversity
Like any purchase, shopping around and comparing suppliers is essential to landing the best offer and purchase terms. This is why supplier diversity is so important.
Similar to the previous KPI, supplier diversity can also help reduce supply disruptions. Greater supplier diversity creates a more resilient business ecosystem and provides greater economic opportunities that benefit the business.
3. Delivery time
On-time delivery, or OTD, is an essential supplier attribute. Continual late deliveries should raise a red flag. Delivery time is intertwined with other KPIs we suggest in this list, including supplier performance and supplier number; one consistently late-delivering supplier can be disastrous for a business working from an already sparse ASL.
This KPI has the unintentional but enormously beneficial added bonus of acquiring and monitoring parcel carrier delivery time tracking data. Access to real-time delivery data, from large carriers like DHL down to your local delivery drivers, is invaluable when setting lead times and choosing the best carrier for both the goods and the customer.
4. Contract compliance rate
Before the advent of business process management (BPM) software, businesses relied almost solely on audits for information on suppliers’ adherence to the standards of their contracts. Now that it’s possible to assess large amounts of data in a very short time, consider the following metrics as a starting point for finding your suppliers’ contract compliance rate:
- Missed contractual obligations
- Number of inaccurate or erroneous vendor authorizations
- Number of terminated contracts
- Number of unresolved disputes
Avoid the difficulties of non-compliance before a contract is signed by securing the best suppliers from day one: set specific criteria for what compliance looks like within your organization. Most importantly, once a contract has been signed, performing regular audits.
5. Supplier availability
Some orders simply have to be expedited. As you and your customer face crunch time, do you have the supplier support you need? To find out, calculate the ratio of the number of times a supplier has filled your orders satisfactorily by the number of orders you’ve placed with them. Tracking this value over time will reveal suppliers who consistently meet your needs.
6. Supplier defect rate
This cornerstone procurement KPI measures the percentage of products received from suppliers that don’t meet agreed-upon compliance standards. Product defects cause huge delays in production and time and, in industries like automotive and nuclear power, they can be life-threatening.
The most common method to determine a supplier’s defect rate is to divide the number of defective products from that supplier by the number of units tested. Occasional defects aren’t unheard of, but you should think twice before doing business with suppliers who consistently ship defective products.
7. Supplier rejection rate and cost
Businesses employ quality control analysts to carefully inspect each item received from suppliers; these inspections can result in the acceptance or rejection of goods. Consistently rejected items reveal volumes about a supplier’s QA operations, so it’s important to employ a procurement tool that continually tracks this vital information.
The costs incurred when items are rejected are high in both currency and reputation — your reputation. One bad supplier can besmirch your name in your industry as delivery dates are missed and lead times extended.
8. Supplier lead time
Lead time, or the amount of time that lapses between a supplier’s receipt of and delivery of an order, is among the top three attributes (along with pricing and quality) buyers consider when choosing a bid winner. Suppliers set lead times based on several factors, including:
- Production lead time
- Inventory supply
- Internal inspection or dedication process
- Parcel carrier reliability and price
Suppliers set lead times by adding together the total number of days required to obtain materials, manufacture parts, assemble them, and deliver the finished products. Short lead times are, of course, highly preferable, and often take precedence over price when a need is urgent. A supplier with consistently fluctuating or abnormally long lead times should be a cause for concern.
9. Price competitiveness
You may find little or no supplier competition for a crucial part you use, making it possible for one supplier to dictate your pricing and bottom line. Avoid this situation by working ahead and:
- Measuring the price points of your suppliers next to those of industry averages.
- Creating a shortlist of those suppliers who stay well-stocked and offer discounts.
“But how do you measure something so nebulous?” you may be asking. Great question.
While no specific calculation exists to determine price competitiveness, diligent market research in both your industry and that of your suppliers’ helps calculate the average item cost and possible alternative sources for obtaining it.
Businesses tend not to prioritize procurement KPIs that consider procurement employees, but a procurement department’s size and scope have an impact on efficiency and the bottom line. Consider the following as you seek to streamline your business operations and continuously improve procurement processes:
10. Headcount and spend-per-employee
Tracking and measuring the number of full-time employees in a procurement department produces valuable data for budgeting and forecasting. Criteria to consider when deciding the right headcount are workload size, sector size (the public sector is typically far larger than that of the private sector), and the capabilities of your eProcurement tool or BPM software.
The spend-per-employee KPI is made up of the expenditures related to a business’s procurement operations. Given the vast scope of duties required of procurement teams (see KPI #12 ahead), a high rate should not automatically mean job cuts. Tracking this data over a set time is important to fill talent gaps and reveal departmental inefficiencies, ineffective training, and subpar employee performance.
11. Cost savings and avoidance
The cost savings, or cost reduction, KPI is a measurement of cost savings achieved by deliberate efforts and strategies over a set time period. As cost savings remains one of the baseline goals for any procurement team, this is a key KPI to track. Fortunately, its measurement is a simple comparison between old expense costs and the most recent.
Sometimes businesses move beyond measuring existing cost savings to a more proactive, strategic approach. Procurement cost avoidance is the practice of actively reducing the likelihood of future costs and unnecessary charges. What can your business do in the present to affect future costs? Several things, as it turns out. Start here:
- Replace a faulty part rather than an entire piece of equipment.
- Actively negotiate with existing suppliers for better prices.
- Streamline procurement processes to find extraneous spending.
- Implement automation tools to reduce human errors and speed up production.
12. Spend under contract
Spend under contract, also known as on-contract spend, is a complex series of procurement KPIs that has almost as many meanings as the number of organizations that employ it. Driven down to its simplest form, it measures the percentage of the preferred supplier (a supplier onboarded after a thorough vetting process by the procurement team) addressable spend (all cash that has been disbursed to that supplier) that can be traced directly to a contract.
A high spend-under-contract rate indicates a superior procurement team dedicated to driving value and decreasing potential risk. Obtaining a high rate requires:
- Careful supplier vetting
- Ideal pricing, terms, and conditions obtained via thorough contract negotiations
- Regular supplier performance evaluations for quality, timeliness, and price fairness
- Implementation and a keen understanding of streamlined procurement process tools utilizing time-saving automation and advanced data analytics
13. Purchase order (PO) cycle time
The time that elapses from a buyer’s receipt of a purchase requisition to the transfer of the PO to the supplier is known as PO cycle time. During this time, several events occur as outlined below:
|Purchase request intake||A purchase request received and reviewed by the procurement team.|
|Budget review and request for proposal||Finance reviews the PO and establishes the availability of funds. Requests for proposals (RfPs) are sent to potential suppliers.|
|Supplier review||The procurement team reviews supplier RfPs and chooses a winner. If negotiations of price, terms, or conditions are necessary, they occur at this stage.|
|Purchase order generation and submission||A PO is released to the chosen supplier; the PO acts as a legally binding contract.|
This KPI is an important part of the greater procurement cycle. It establishes the ordering process and resulting PO (not assembly or final product).
This process within a process serves as a measurement of the efficiency and effectiveness of your procurement team. Reducing PO cycle time is also one of the single best ways to enhance your company’s reputation and customer experience. Finally, it brings previously unattainable visibility and financial accountability to the PO process, which is a great benefit for the accounts payable team and procure-to-pay process.
14. Training and development time
The efficient training of procurement team members is imperative. Not only must new hires hit the ground running to keep the procurement process in motion, but they must also become adept at their numerous duties as contributing team members.
This KPI calculation is straightforward and often performed automatically by post-training assessments. A trainee’s elapsed time will reflect how quickly they got through the material, and their graded score reflects how clearly they comprehended it.
Note: This KPI applies only to self-led learning courses taken by employees online, at their own pace.
15. Lead time
If you’re looking for one metric that gauges the overall efficiency of your supply chain, track the lead time KPI. It measures the time that elapses between your receipt of a customer order and that customer’s receipt of their items. It involves order processing, production, and shipping time, so it quickly reveals procurement process inefficiencies. The lower the lead time, the more efficiently your business is running.
Calculate the total lead time by adding the three lead time phases together, as follows:
16. Rate of emergency purchases
Occasional emergency purchases are unavoidable for any business. When they occur repeatedly, however, they become costly because:
- They interrupt the supply chain flow.
- There is a lack of leverage for price discounts or negotiations.
- There is a lack of purchase visibility.
- A surge in expedited shipping fees can easily double or triple an order’s total.
High rates usually reflect poorly upon a business and its procurement team, indicating a lack of inventory control and an incomplete vetting process. Lowering this KPI, therefore, requires renewed efforts in future planning, supplier sourcing, and procurement team training.
Measure this KPI by dividing the number of emergency orders by the number of total orders.
17. Purchases on time and within budget
Budgets and deadlines are set to ensure that enough stock is on hand to fill orders and to allow adequate shipping time. Organizations that consistently fail to meet either set themselves up for losses in customers, reputation, and revenue.
This KPI concerns every employee of a business and should be monitored frequently, even in the best of times, to pinpoint any possible bottlenecks before they snowball into problems.
Procurement professionals know that their vast and complex duties depend on many other — if not all — departments within an organization. Sales and marketing, inventory control, finance, and IT must collaborate to ensure the best quality goods at the best possible price. The following KPIs are useful for measuring the performance of procurement operations.
18. Inventory accuracy
The inventory accuracy metric reveals the difference between the number of stock items listed in a business’ digital (or paper) records versus the physical items held in inventory. Lowering this KPI can save significant costs (storing extra inventory, unsold unregistered inventory) and customer relationships (stock shortages leading to supply chain bottlenecks).
You can calculate this KPI rate by performing a physical inventory count, dividing it by the number of items on record, and multiplying the resulting number by 100. Keep the following in mind when performing an inventory count:
- Schedule regular physical inventory counts.
- Confirm any physical inventory count among multiple employees.
- A physical inventory count should always focus on accuracy.
- Use BPM tools to maintain digital inventory records.
19. The ratio of spending to sales revenue
This KPI compares the expenses of a designated sales channel — a business branch or division, for example — to its sales revenue. A climbing spending-to-sales rate (showing excessive expenses) indicates declining gross profit margins.
That’s a red flag, and finding the root of its cause is extremely important before it snowballs into a bigger problem and bigger losses. One or more of several issues may be at play, like budget deviations, low sales, high shipping rates, or low-result investments like advertising campaigns.
20. Inventory turnover
Inventory turnover, or “stock turn,” measures the frequency with which a business sells and replaces its inventory in a given timeframe. Rather than driving one universal action, measuring inventory turnover is helpful for businesses looking to boost sales to improve their inventory management processes. It is widely used in the retail industry, whose revenue comes from direct sales to customers.
Low turnover means weak sales which, in turn, raises the possibility of low demand, inadequate marketing, or a lack of understanding of the market you serve. It results in unsold stock, or “dead stock,” which exacerbates the underlying issue by delaying the stocking of new merchandise.
Leaders of any business going through a period of low turnover can take one of several actions to raise it again, including:
- Price discounts
- Ordering merchandise in smaller quantities
- Shifting marketing strategies
- Using an automated tool for continual inventory management and improve forecasting
To measure this KPI, divide the cost of all goods sold in a set time period by the average inventory value during that same time:
|Cost of products sold / average inventory = inventory turnover ratio|
21. Cost per invoice
As its name suggests, cost per invoice is the internal cost related to processing an invoice. It comprises three main data points: the time taken to track the opportunity, employee compensation, and the electricity of the organization’s building/facility. The process — especially when conducted manually — is one rife with hidden costs beyond these, including time correcting errors, reviewing invoices, and archiving and storing records.
Small businesses don’t traditionally measure this KPI. Larger businesses that make hundreds of daily sales and employ a highly skilled procurement team can see their cost per invoice rise to as much as $400, however. Making the switch from manual operations to invoice automation is the best way to lower this number and eliminate its hidden costs.
22. Procurement ROI
How does money spent by a business’ procurement department pay off? The procurement return on investment (ROI) KPI measures this, effectively showing leadership how its procurement operations affect the overall bottom line. Find it by using the following calculation:
|Annual cost savings / Annual cost of procurement operations = procurement ROI|
How to measure procurement KPIs
Our exploration of several procurement KPIs here includes formulas to give you a general idea of what those numbers might look like for your business. Calculating these metrics by hand on a daily, or even weekly, basis isn’t a good use of your procurement team’s time; in fact, we don’t recommend it — but we do recommend leveraging digital tools.
Digital tools not only have the power to continually track this information, but organize and display it simply. With visibility into real-time KPIs and performance, teams can improve business agility and keep up with competitor and supply chain activity in real time.
eProcurement tools make use of the internet and a closed (to the public) software system to conduct procurement operations online. Only those suppliers who have been selected to submit bids and POs for that particular project have access to these systems. The software usually consists of hyperlinked email or web portals for submittals that connect to databases on the buyer’s end.
Procurement data collection encompasses the collection, organization, and management of all data within an organization that pertains to procurement processes. Enterprise resource planning (ERP) systems are widely used to collect and store this vast, fragmented information in addition to running day-to-day operations within the procurement department and the business at large.
Collecting data and perceiving what it reveals is not the same thing. Stored data fragments must be standardized, organized, and made accessible. BPA software is a comprehensive method to achieve this. They break down data silos to connect sources, increase accuracy, and amplify an organization’s ability to scale. The results are presented in customizable, easy-to-use dashboards, databases, and reports.
The ongoing successful use of data to drive decision-making and risk management creates what is known as a data-driven culture. As we continue to see the ripple effects of pandemic-era supply chain disruptions, more businesses than ever are looking to establish themselves as adaptable, agile, data-driven cultures.
Best practices for tracking procurement KPIs
Setting up an eProcurement, ERP, BPA, or an integrated combination of these three tools, is a huge step on the path to efficiency. To truly get the most out of your new efficiency tools, keep the following best practices in mind.
- Set specific goals and targets. What insights are you looking to measure, and what are you looking to improve? This is the time for long, detailed lists of targets to reach and goals to get there. Gather your team and create a plan.
- Use relevant and reliable data. As you begin, focus on the data that most closely aligns with your procurement goals. The sheer amount of data available to businesses can make this more difficult than it might seem. The reliability of this data is crucial, as well. Outdated numbers can cause big revenue losses.
- Communicate results effectively. Involve and educate all relevant procurement staff from the introduction of any new KPI target. The people who carry out daily operations should be considered stakeholders in the endeavor and will be far more likely to understand the results their actions helped deliver.
- Continuously improve KPIs. Once KPIs are defined and tracked, it does not meet that they “end” or that tracking is done. Performance indicators are needed for as long as a business exists. For the business to thrive, it must steadily improve despite market upheavals. Continuously revisiting, improving, and adjusting procurement KPIs is a great way for any organization to keep costs at a minimum, maintain a list of reliable suppliers, and provide customers with the highest quality goods and services.
Visualize and track procurement KPIs with Pipefy
Procurement teams have a massive amount of information to gather, store, and make sense of, in addition to their day-to-day tasks. Here to help them streamline this data and gather the insights they need to create a more efficient procurement process is Pipefy.
Pipefy is a user-friendly process automation solution that helps bring all of procurement’s many moving parts — from request intake to invoice reconciliation — and stakeholders — like requesters, suppliers, purchasing teams, and accounts payable — into one centralized and integrated platform.
Pipefy’s no-code automation solution requires zero previous coding experience, so teams can design and build expert-led automated workflows to eliminate repetitive, manual tasks and the inevitable silos that hinder performance.
Measuring procurement KPIs is a snap with Pipefy’s With built-in customizable dashboards, gathering real-time insights, and conveniently generating detailed reports at the click of a button.