Top 10 Procurement KPI\'s

Top 10 Procurement KPI\'s

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  Jag Amberkar
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  How does yourprocurement organization measure up? • To accurately determine how your procurement organization is performing are the key metrics used to measure and benchmark supply management efficiency and effectiveness.
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  Top 10 KPI’sused widely used by successful procurement organizations. • Total cost savings • Quality • Delivery • Cost avoidance • Implemented cost reduction savings • Procurement Cycle Time • Percentage of suppliers accounting for 80% of the spend • Procurement ROI • Managed spend as percentage of total spend • Contract compliance
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  Total Cost • Theaggregate amount of money procurement saves by reducing the total cost of ownership (TCO) from one year to the next excluding changes in volume. This measures the purchasing departments contribution to the financial success of the organization. • These are actions that can be directly traced back to the P&L (Hard savings)
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  Quality • Supply basehas demonstrated continuous improvement in defect rates. This can be achieved by identifying metrics such as defects per million (DPM) that effectively measure the progress being made towards “betterment of quality”.
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  Delivery • This KPImeasures how well the procurement department gets what the organization needs when it needs it. – Delivery to promise date – Delivery to (original) schedule date – Delivery to rescheduled dates Measured as % of on time total shipments when volume is large enough.
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  Cost Avoidance • Costavoidance is a cost reduction that results from a spend that is lower than the spend that would have otherwise been required if the cost avoidance exercise had not been undertaken. – Examples: delaying a supplier’s price increase, additional services such as training at no cost or long term price protection provisions. These ‘soft costs’ turn into hard costs over time.
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  Implemented cost reduction savings • As opposed to ‘identified’ or ‘pipeline’ cost reductions, this KPI measures negotiated savings that have actually been realized and implemented by the organization. – Resourcing a component or supplier after the part has been qualified and put into production – Backleveraging a supplier once the contract has been changed
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  Procurement Cycle Time •The average time it takes between requisition submission and purchase order placement is one measure of procurement cycle time. • Another cycle time that can be measured is the time it takes from the beginning of a sourcing process to the time that a contract is signed.
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  Percent of activesuppliers accounting for 80% of total spend • This KPI measures the current state of supplier consolidation and activity within supply base from the previous year. – New product introductions may impact this metric – Changes in sales within the product portfolio may have an effect as well – This KPI drives efficiencies within the procurement organization and drives down costs/PO
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  Procurement ROI • ThisKPI measures the procurement department’s cost effectiveness. This is measured by comparing implemented cost savings to the procurement department’s operating budget.
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  Managed Spend asa percentage of Total Spend • Managed spend is the amount of spend that the purchasing department influences throuth the strategic sourcing process. Total spend is the amount of money organization spend on products and services each year. This does not include labor cost. • Spend under management (SOM) is as high as 85% in companies with best in class strategic sourcing organizations.
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  Contract Compliance • ThisKPI measures compliance to contract service level agreements (SLA’s), contract terms and conditions, and pricing agreements. This metric is used to benchmark suppliers compliance to the standards they have negotiated.
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  Summary • Capturing baselineKPI information within the supply base promotes ongoing supplier compliance and identifies areas of opportunity • Actively measuring these top 10 KPI’s is the key to continuous improvement across an organization’s supply base. • Benchmarking KPI’s against other best in class procurement organizations creates procurement goals and targets.