Are Your Procurement Metrics Meeting the Gold Standard?
In case you missed it, we recently released an eBook titled 5 KPIs that Enhance Contract Performance. In it, we explored five Key Performance Indicators (KPIs) to help you identify the ways in which your current CLM does — or doesn’t — measure up. It’s a must-read for those in the procurement space and anyone who sees the value in effective contract and vendor management.
Keeping with that theme, we’re taking a look at a great blog post recently published by one of our partners, Procurement Foundry.
The blog post, How to Measure Your Success with Procurement Metrics, covers the importance of procurement metrics and proceeds to detail 15 different metrics that can make or break your success when it comes to healthy, profitable supplier relationships. Let’s dive in and discuss this topic, as well as provide some additional tips and feedback on why making sure your procurement metrics are up to snuff should be a priority for everybody.
The Importance of Procurement Metrics
By now, we all know the weight that metrics carry when an organization needs to figure out if their current endeavors (whether that’s marketing, sales, IT, you name it) are working in their favor or not. Without them, your business is essentially operating while wearing a blindfold. Metrics help us determine if we’re growing, if we’re making the right choices, how our strategies should be tweaked, and so much more. Procurement metrics, specifically, have KPIs that “track everything related to the procurement of goods and services.”
It all starts from the top down. If leadership is aligned on which procurement metrics they’re monitoring, it sets them up for success in just about every way. Unleashed Software agrees that having a clear picture of procurement costs, business needs, and market conditions “will help to inform realistic short and long-term goals for businesses over the coming year.”
Procurement Foundry writes that procurement KPIs do the following:
Allow procurement managers to make data-driven process improvement decisions
Help procurement managers to monitor, manage, and improve process performance
Permit organizations to optimize and regulate their purchase expenses, quality, cost, and time
Procurement metrics affect the broad scope of an organization. The decisions made by those in procurement can affect basically every team in some capacity, from a suboptimal project management software creating lag in the marketing department to a supply-chain-related shortage of automotive parts that prevents the assembly line workers from completing their daily tasks.
These metrics lend themselves to many different areas and use cases. For example, these insights can be leveraged for better strategic sourcing when it comes to looking for a new supplier since cost, quality, and compliance of the current supplier can all be easily determined. Another example would be something as basic as contract management — specifically renewal dates, with procurement metrics offering insights on negotiation times, deadlines, etc.
“Remember, success is defined by way more than cost savings,” says Procurement Foundry. “And the procurement function that isn’t futureproofing their supply chain to withstand disruptions will be the one with poor KPIs. If you’re trying to avoid bad conversations with the C-Suite, diversifying your KPIs and scorecards is key.”
Which Procurement Metrics Should You Be Tracking?
While Procurement Foundry goes into detail on 15 of these KPIs, we’re just going to touch on five of those here today. To check out all 15, be sure to check out Procurement Foundry’s blog.
Metric #1: Supplier Quality Rating
“Quality” can span a lot of different criteria when it comes to this metric, but ultimately boils down to what you pay juxtaposed with the quality of the product or service you’re receiving. You want suppliers who will sell you the absolute best solutions or materials at the lowest rate possible, tick all the boxes when it comes to prompt and efficient business communications, and remain reliable year over year. If the quality rating dips below what your organization considers satisfactory — or worse, stays there — it’s time to reconsider doing business with this vendor going forward.
Metric #2: Number of Suppliers
The amount of suppliers you’re working with determines your dependency on said suppliers. Making sure you have the right amount of supplier diversity for your organization’s needs is highly important.
Procurement Foundry writes, “If you only have a few, your dependence on the reliability, quality, etc., of each is high. This was not always necessarily bad, but if the COVID era taught us anything, it’s that things can happen, and we need to be prepared with the ability to pivot, not solely depending on one or two vendors.”
Metric #3: Procurement ROI
It’s a no-brainer that return on investment (ROI) should be a top priority for procurement professionals. If your investments aren’t profitable, each month without reassessing and/or reallocating resources can cost your organization significantly. According to Forbes, determining procurement ROI goals and your state of operations can be the first step to improving your overall strategy. And with significant cost savings opportunities on the line, regular ROI evaluations are critical in the procurement space.
“Proper procurement is a must for high-growth organizations and global enterprises looking to maintain resiliency and combat uncertainty, as it provides the key intelligence needed to make smarter business spend decisions,” states Joe Fox, council member at Forbes. “Discover your procurement ROI and elevate your procurement function — your employees, stakeholders and bottom-line will thank you.”
Metric #4: Compliance Rate
Compliance is more than just a buzzword. It’s become a crucial measure of success for organizations, their investors, and the public eye.
Keeping a pulse on procurement compliance rates not only helps you rest assured that your suppliers are fulfilling all their requirements — you can also take comfort that your business strategy, company reputation, and overall operations aren’t at risk. Not to mention the legal ramifications that a non-compliant supplier can have on your organization, which can be disastrous.
Metric #5: Procurement Cost Avoidance
Cost avoidance, in terms of procurement, is defined by GEP as “the preservation of existing spending to prevent price increases due to inflation, economics, or the rising costs of products or services. An example of cost avoidance is when a company purchases an extended equipment warranty to limit maintenance costs or out-of-pocket expenses.”
So, why pay more for a product or service than you have to? Unfortunately, many procurement teams end up doing just this because they aren’t tracking the correct data. But with the right procurement metrics in place, forecasting is a real possibility. And turns out, arming yourself with past data to help predict the future is a luxury few can afford to skip out on.
As we mentioned, Procurement Foundry covers all these metrics and more — however, the ones we listed above serve as a solid jumping-off point for those looking to apply a KPI-forward approach to their vendor strategy.
In a world where numbers are valued above all else, we encourage you to make sure that access to relevant and accurate procurement metrics is a top priority. Because with companies utilizing more third-party outsourcing than ever before, these analytics are a necessary safety net for SPVM professionals to make the best procurement decisions possible.