Procurement performance measurement is necessary for effective alignment of purchasing activities with the overall strategic objectives of the organisation. But above cost savings, effective procurement encompasses the creation of value, management of risks, and supplier relationships, as well as better operational efficiency. With appropriate performance metrics in place, businesses can determine how effectively the procurement function delivers results within the organisation and identify areas for potential improvement in smarter decision-making. In this article, we will discuss eight such practical, proven means of measuring procurement performance and enhancing your purchasing strategy.
What is procurement performance?
Procurement performance signifies the efficiency and effectiveness with which an establishment's procurement section accomplishes its objectives, that is, obtaining goods and services possessing the right quality, quantity, price, and time. It is reflective of how well this section supplements the entire business in terms of its objectives, controlling costs, managing suppliers, reducing risks, and achieving policy compliance.
In simple words, procurement performance can be summarised as How well is the company buying what it needs to operate and grow? Enhance your procurement skills with specialised Successful Strategic Planning & Procurement courses offered by the British Academy for Training and Development.
Ways to measure procurement performance
Here are eight ways to measure procurement performance:
1. Define your procurement objectives.
First, identify and quantify procurement performance measures that give actionable insight into procurement performance improvement. They should be consistent with the following basic procurement objectives: maximising return on investment through cost savings, improving quality and compliance, increasing efficiency and productivity, managing risk and sustainability, and innovating and creating value. The next step here is to choose procurement measures.
2. Choose your procurement metrics.
The right procurement metrics must be chosen. These are measured to be actual, trustworthy, and realistic. They should also be easy to collect, analyse and present. Common procurement metrics include spend analysis (how much money has been spent in various categories, suppliers, and regions), savings (the difference between the actual cost and expected cost for procurement activities), quality (to what extent the goods and services meet or exceed specifications and standards), cycle time (the amount of time for procurement processes from sourcing to delivery), compliance (the degree to which procurement activities adhere to policies, regulations and contracts), and supplier performance (performance of suppliers with respect to quality, cost, delivery, and innovation).
3. Implement your procurement dashboard.
For measuring procurement performance, it would be to create a user-friendly, interactive, and customisable procurement dashboard that communicates with the data sources, systems, and platforms you are currently working on. Monitoring, reporting, and enhancing this tool's procurement performance indicators are fostered by the collaboration described. Your dashboard will contain visual presentations of your procurement metrics, such as pie charts, bar charts, and line graphs. It also comes with filters and segments to narrow down or group your procurement metrics by category, supplier, or region. Also, this dashboard should include comparisons like benchmarks and targets such as industry averages, best practices, or past results. Alerts and notifications can be set up for signals or messages when procurement metrics fall outside the benchmark values or deviate from the target. Finally, it should incorporate action plans and recommendations containing steps or suggestions on how improvement of procurement metrics will be executed, like renegotiating contracts, changing suppliers, or applying new technologies.
4. Procurement Cycle Time
The definition of procurement cycle time is the elapsed time between the time when a requisition has been created and the time when goods are received. The most poignant way to cut procurement costs is to reduce cycle times in procuring materials and services. Research conducted by the American Productivity & Quality Centre (APQC) affirmed that better performance in procurement is correlated with fewer hours spent in placing an order and fewer days waiting before materials arrive from suppliers.
Automating the procurement process along the supply line provides a reduced time when the ordered material gets accrued. As published by APQC's research, the e-commerce/e-procurement software reduces the cycle time of an organisation from seven days to two. It thus provides the projects with required items early but also takes efficiency to a new height in procure-to-pay.
5. Vendor Performance
Vendor performance management is the process of monitoring as well as analysing the reliability, quality, and performance of your company vendors. Monitoring your vendors helps your organisation improve efficiency and profits, lower inventory levels and costs, and improve customer satisfaction both internally and externally.
Some performance indicators to monitor for vendor evaluation include:
Delivery lead time Communication time lags Quality of the products suppliedPricing competitiveness Frequency of price changesCompliance with negotiated termsSubstitutions made Number of backorders6. Spend under management
Spend under management is the degree of procurement involvement in any of the expenses made by an organisation. This remains a standard measure of performance that can be applied easily and uniformly across divisions of organisations, regardless of the industry and size. For every dollar put under management, the average enterprise realises a benefit ranging from 6% to 12%. This speaks of the revenue efficiencies possible by putting unmanaged spending under management; hence, procurement professionals can deliver a solid value proposition and maximise savings for their organisation.
7. Cost savings
Cost savings is still one basic, major yardstick for sales measurement in the purchasing function. Latest analysis done recently by The Hackett Group discovered that world-class procurement organisations incur 21 per cent less expenditure (which could translate into cost savings of up to $6 million for the typical large company) and have 29 per cent fewer full-time equivalents but generate more than double the procurement cost savings typically produced by such organisations. Cost savings sound simple enough, but how are companies successfully reducing costs? One direct way is to reduce the cost per purchase order, using techniques including:
Investing in digital technology and process automationIncorporating vendor self-serviceAdding mobile requisition and approval capabilitiesUsing guided buying catalogues and PunchOut tools8. Percentage of POs that are catalogue-based
The metric belongs to not everyone's list, but if used as a proxy for contract compliance and price compliance in most instances, it will yield valuable insight. When most errands are routed to approved vendors where prices are set, they would cost less, have better services, and would have fewer mistakes. Besides, it opens up architectural walls to requisitioning while empowering individual users to initiate the process as well as releasing the procurement department to negotiate even better deals if guided by buy catalogues or PunchOut catalogues.