Monitoring the performance of your procurement team is essential for optimizing their processes. At the end of the day, you can’t improve what you can’t measure.
Many organizations prioritize cost savings. Yet, this approach isn’t comprehensive enough, as it may overlook key aspects and the full scope of strategic procurement. It prioritizes price over value, and this might not be the best strategy for your organization in the long run.
In this post, we'll discuss procurement KPIs that provide a comprehensive view of the entire process and that you should track for better procurement. We’ll cover:
- Cost KPIs
- Inventory KPIs
- Quality KPIs
- Delivery KPIs
Without further ado, let’s get started.
What are Procurement KPIs and Why Do They Matter?
Procurement KPIs are metrics that measure and track the success of procurement teams. Typically, they're numerical data tied to set goals or benchmarks. Often, they’re also referred to as sourcing KPIs or purchasing KPIs.
Procurement KPIs are useful to:
- Assess and track the effectiveness of procurement management
- Streamline organizational spending, time, quantity, and sourcing
- Align procurement outcomes with broader organizational goals
- Guide your organization in process improvements and strategic planning
As we previously mentioned, while cost savings play an important role in procurement KPIs, they shouldn't be your primary concern. If you only focus on your expenses, you can lose sight of procurement's strategic nature.
Selecting relevant KPIs and using actionable metrics can significantly improve your decision-making and offer you a precise view of your team’s performance.
13 Key Procurement KPIs
Procurement KPIs can be divided into many categories. Some of the most relevant ones include:
- Cost KPIs
- Inventory KPIs
- Quality KPIs
- Delivery KPIs
Let’s take a look at each one.
Let’s begin with the fundamental KPI for all procurement teams, costs.
The most common cost KPIs include:
- Cost savings
- Cost avoidance
- Spend under management
- Price Competitiveness
This metric assesses the hard savings achieved over a specific period by negotiating with vendors. Cost savings is usually displayed as money or as a percentage.
This metric reflects your procurement team's performance in driving savings and managing costs effectively. Additionally, it helps them optimize the supplier lifecycle and implement supply chain analytics.
Cost avoidance is, essentially, any effort to reduce future expenditures, such as:
- Sourcing improvements
- Replacement of defective equipment
- Process improvement investments
Unlike cost reduction, cost avoidance focuses on strategic spend or soft savings that aren’t directly reflected in the company's bottom line. Procurement teams can use this metric to minimize future costs and avoid price increases caused by inflation or economic conditions.
Spend Under Management (SUM)
Spend under management (SUM) is the percentage of total business spend that adheres to procurement policies and is effectively managed by the procurement team.
Unmanaged or maverick spending can:
- Expose your business to risks
- Hinder precise expense forecasting
- Amplify waste
While completely eliminating maverick spending may be unlikely, the goal is to ensure its presence is minimal. Thus, procurement teams typically aim to
manage 80 percent (or higher) of overall spending.
Price competitiveness compares your current spend with market data to ensure you’re not overspending on goods and services. In other words, it compares your organization's spend to industry averages in each cost category.
Using this KPI, procurement teams can understand market conditions, narrow down vendors, and focus on those that offer the buyer a distinct competitive advantage.
Monitoring inventory levels helps optimize stock and prevent shortages or excesses. All in all, it ensures smooth operations while minimizing costs.
Some inventory KPIs worth tracking are:
- Warehouse space utilization
- Inventory aging
- Inventory turnover ratio
Warehouse Space Utilization
Understanding how warehouse space is managed can provide procurement teams with useful insights into capacity, efficiency, and inventory value. This KPI shows warehouse utilization as a percentage of its total capacity. Thus, procurement teams can tell whether there is extra capacity available.
An inventory aging report provides you with insights into how quickly your inventory moves. It includes a list of all available items, organized according to how long they have been in inventory.
Inventory aging is used to identify inventory that is out-of-date or slow-moving as well as the costs of storing and maintaining these items.
Typically, a reasonable inventory age is 60 to 90 days after the day it was received. On the flip side, inventory over 180 days is usually considered dead stock and should be prioritized before placing new orders.
Inventory Turnover Ratio
The inventory turnover ratio reveals how frequently a business has sold and replaced inventory over a specific time frame.
Procurement teams can use it to:
- Assess the efficiency of inventory control
- Improve decisions around pricing, production, and purchasing
A low inventory turnover ratio could indicate poor sales or an excess of inventory. Meanwhile, a greater ratio may indicate strong sales or inadequate inventory stocking.
The success of your company is closely related to the quality and availability of your supplies and resources.
Here are some quality KPIs worth tracking:
- Compliance rate
- Supplier defect rate
- Purchase order accuracy
The compliance rate KPI indicates the percentage of vendors who meet their contractual obligations.
Some examples of contractual requirements are:
- The cost of goods
- Delivery time
- Payment method
- Reaction time in case of delays
- Exclusive discount offers
- Invoice accuracy
With this KPI, procurement teams can get insights into vendor relationships and verify that most of them are delivering their promised value. Besides, it provides insightful data for future negotiations.
If your compliance rate drops, there is a significant chance that maverick or indirect spending will rise and harm your bottom line.
Procurement teams can calculate the compliance rate by taking a look at:
- Differences between quoted and paid prices
- The percentage of disputed invoices to total invoices
- The accuracy of the delivered goods’ quantity
Supplier Defect Rate
The supplier defect rate is used to assess each supplier’s quality. It tracks and reports issues such as defective, returned, or damaged goods.
Procurement teams can calculate the supplier defect rate by comparing the number of substandard products with the total inspected units. Additionally, they can determine the supplier defect rate based on defect types. This KPI will provide insights into the supplier’s reliability and effectiveness.
Purchase Order Accuracy
Purchase order accuracy (PO accuracy) is used by procurement teams to know whether suppliers are delivering as ordered and on time. PO accuracy can be measured across buyer segments, supply categories, and more.
Some trackable indicators include:
- Product/service delivery ratio outside the pre-defined target
- Incorrect deliveries percentage over total purchase orders in a specific timeframe
Tracking your supplier’s delivery times is crucial to ensuring smooth operations and meeting your business demands.
Some KPIs you should track include:
- Supply chain cycle time
- Purchase cycle time
- Lead time
Supply Chain Cycle Time
Supply chain cycle time indicates the maximum lead-time needed to fulfill a customer order with zero inventory, covering procurement, waiting, order completion, and shipping time.
This metric identifies efficiency problems and areas where the company can improve its competitiveness.
This KPI measures the number of days a vendor needs to deliver goods or services after accepting a purchase order. It starts with the availability confirmation and ends with the delivery.
Procurement teams can set benchmarks for suppliers and use this metric to establish goals for operational improvements.
Purchase Order Cycle Time
Purchase order cycle time (PO cycle time) indicates the total time spent on a purchase order during the procurement process, from creation to payment completion. This KPI is measured in hours and days, and excludes production and delivery times.
PO cycle time is crucial for pinpointing the ideal supplier to swiftly address urgent orders and ensure quick fulfillment.
Optimize Your Procurement Process With Cledara
Today, we learned about the metrics you should monitor to get a comprehensive picture of your procurement team's performance. Clearly, it goes way beyond costs.
Nevertheless, it’s worth noting that procurement KPIs aren’t set in stone. They hold different meanings for different businesses, and they may change as your business grows, so consider this guide as a useful reference.
However, most modern businesses report that software is their second largest expense. And if left unmonitored, it can get out of hand.
Do you know how many SaaS subscriptions you're currently paying for? Are you aware of each tool’s ROI and utilization? Here’s where Cledara can help.
Cledara is the only SaaS management platform that allows procurement teams to:
- Get full visibility over their software stack
- Streamline key steps of the procurement process from request to purchase
- Ensure compliance with procurement policies
- Identify saving opportunities and optimize software spend
- Have a single place to manage vendor contracts, payments, and software subscriptions
- Get valuable insights and reports over software usage across the company
- Collaborate effectively with IT and Finance teams
- And more
Take control of your SaaS stack. Book a Cledara demo today.