In today's competitive landscape, businesses are continuously seeking ways to improve their business process management and gain a competitive advantage. The procurement function stands as a cornerstone in achieving these business goals.
An efficient procurement process is not just about sourcing materials or products but also about ensuring an impactful business strategy that leads to positive outcomes.
While other procurement leaders may prioritize different success measures, we advise monitoring 8 crucial KPIs (Key Performance Indicators):
- Return on investment (ROI)
- Cost avoidance
- Time saved
Return on investment (ROI)
Procurement ROI is the linchpin that showcases the effectiveness of the procurement team. It gives businesses a complete picture of the financial returns they're getting from their procurement investments.
It becomes imperative to benchmark ROI against industry standards. This not only provides visibility into how well the procurement team is performing but also offers insights into potential areas for process improvements.
If your outsourced procurement team can create a positive ROI, that's a quick win and indicates you've chosen a good partner who is worth the cost. This can also be the most compelling if you need to defend your budget.
Cost Avoidance
While annual procurement savings are essential, cost avoidance plays an equally pivotal role. It involves foresight – identifying potential costs before they escalate. This is where advanced reporting and dashboards can be instrumental.
It's helpful to track any cost avoidance that outsourcing your procurement department can help you achieve. For example:
- Spotting tech overlaps – Features or tools that are costing you double, e.g. if multiple overlapping tools are being used across the company. A dedicated procurement team identifies these redundancies, ensuring businesses don't pay a higher price than necessary.
- Identifying possible downgrades – Tools where you aren't using all the features or licenses and could downgrade to avoid cost.
- Avoiding penalties – For example, helping you spot areas where you consistently receive overage penalties.
- Uncovering “Shadow IT” – This refers to tools or systems used without organizational approval. Identifying these avoids potential compliance issues and ensures adherence to business requirements.
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Time Saved
On-time delivery is critical in the procurement landscape. The time period a procurement team takes from purchase requisition to final delivery plays a significant role in the overall business efficiency.
It's well known that procurement management takes a lot of time, not to mention the mental bandwidth needed to negotiate purchases with multiple vendors. On average, procurement professionals spend about 4 hours per issue or topic result. This amounts to around 1.5 months per year. The amount of time your team saves is a great procurement KPI to measure.
Time or hours saved is also a good metric to measure the objective of increasing visibility. Most companies use a static Excel file for procurement that can easily become outdated within a week, but a good procurement platform will give you a full overview of your tech stack: an accurate number of tools, amount of spend, etc.
Measure the number of hours you save after switching to a procurement partner (like Sastrify) on getting an accurate number of tools and spend. It's not as obvious of a metric as ROI, but it's highly relevant over time.
Compliance rate
Compliance rate signals the adherence levels to both internal and external business standards. As a cornerstone procurement metric, it demonstrates how closely businesses align with their predetermined terms and contracts. When compliance rates waver, businesses often see a surge in maverick spend and increased operating costs.
Metrics that play a pivotal role in determining compliance rate:
- Ratio of invoices that are under dispute compared to the total number of invoices.
- Variance between the actual price paid and the quoted price in the purchase requisition.
- Ensuring that the delivery time and price competitiveness of products sourced align with the terms outlined.
Vendor availability
Vendor availability offers businesses a lens into a vendor's capability to address immediate and unplanned demands. It's a valuable tool that aids businesses in gauging the reliability quotient of their supply chain partners.
Accurate vendor management, especially during peak business cycles, can be the difference between maintaining business continuity and facing operational hiccups.
Cost per invoice and PO
Delving into the cost per invoice and purchase order offers a comprehensive view of an organization's procurement efficiency. This metric often fluctuates based on the tools and technologies employed.
Automated procurement processes, with advanced reporting and digital transformation initiatives, typically see a reduction in per invoice and PO costs compared to more manual workflows.
Factors that influence this cost include:
- The ratio of emergency purchases which often come at a premium.
- The effectiveness of contract management which can directly impact invoice accuracy.
- The procurement team's ability to negotiate terms beneficial for cost savings.
Spend under management (SUM)
Spend Under Management (SUM) stands out as a key metric of procurement performance, shedding light on the percentage of expenses actively managed and regulated by procurement staff.
Higher SUM percentages are indicative of more robust control over costs and better alignment with business goals and strategy.
Spend under management can be calculated as:
SUM = Total approved spend – Maverick spend
Factors impacting SUM include:
- The quality of internal cost monitoring processes.
- Efficiency in supplier relationship management.
- The percentage of products received within the terms of the contract.
Price Competitiveness
Price competitiveness is more than just getting the best price. It's about ensuring that the price paid for products or services offers the best value, keeping in mind quality, delivery time, and other relevant aspects.
An efficient procurement process always keeps an eye on market trends, ensuring that businesses aren't paying more than they should.
Key indicators for price competitiveness include:
- Comparison of the actual purchasing price with benchmark market prices.
- The effectiveness of the procurement team's negotiations of price with suppliers.
- Regular monitoring of price trends using dedicated tools and platforms.
Final thoughts
There are a variety of reasons to track procurement KPIs. For starters, it helps managers build a case for buy-in to tools or services. Plus, you can also measure how your procurement partner is helping you reach internal OKRs.
As businesses venture further into the global market, engaging in active supplier relationship management and using cloud-based workflow automation platforms like Sastrify has become an essential part of the procurement landscape.
A robust procurement strategy that incorporates the right mix of procurement metrics ensures that procurement organizations are not just focused on cost but are also aligned with the broader business objectives.
If your partner is successful in the KPIs we've discussed, then hopefully they'll be seen as business critical. And if you're still looking for a procurement partner that's focused on long-term relationships with measurable KPIs and guaranteed ROI, speak to one of our SaaS pricing experts to see how Sastrify works today.
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