buzzwords related to procurement KPIs

TOP 10 PROCUREMENT KPIS

Procurement Key Performance Indicators and Metrics

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A procurement KPI or metric is a measurable value that tracks all relevant aspects of obtaining or buying goods and services. These key performance indicators enable the procurement department to control and optimise the quantity, quality, costs, timing and sourcing of purchasing processes.

Here is the complete list of the most important procurement KPIs and metrics, that we will discuss in this article in every detail:

visual example of compliance rate for the procurement department

Compliance Rate

Do suppliers fulfil your requirements?

Compliance in procurement represents the whole of basic agreements a company and a supplier lay down. It results in various requirements such as the maximum reaction time in case of any issue, the delivery time, special discount offers, etc. It is a key component in providing guidance and insights into processes, and participates in saving costs through better negotiations with suppliers. On our procurement KPI example aside, the compliance rate is of 68% overall, and it is broken down per type of suppliers: the highest compliance rate is with software suppliers, with 75%, while the lowest is with Digital Services with 9% of compliance. Is also tracked the general evolution over five years, with a pre-set target of 60% that is reached in 2016 and 2017.

Performance Indicators

For an average company that is not a multinational operating world-wide with millions of suppliers or end-users, reaching an overall of 50% of compliance is a good target to set.

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visual example of one of the most important procurement KPIs: number of suppliers

Number of Suppliers

Monitor your level of dependency towards your suppliers over time

Our second procurement KPI tracks the evolution of how many suppliers the company has. Relying on too few suppliers and not diversifying your sources creates a high risk of dependency, and potential further problems if one of them pulls out at the last moment. On the other hand, too many suppliers reduce the possibilities of interesting discounts. The procurement KPI aside shows the evolution of the number suppliers over the years, divided into two categories: contracted suppliers and unlisted ones. Often enough, companies prefer contracting suppliers so that they agree with their terms of compliance – but not all suppliers agree, so they are unlisted. The contracted partners can be classified as gold, silver or bronze according to certain criteria measuring the relationship through discount, reliability, etc.

Performance Indicators

Apart from the level of dependency, the optimal number of suppliers you need should be measured using other metrics like the quantity discount they provide you with, and the defect rate of their supplies.

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chart which visualises the average purchase order cycle time

Purchase Order Cycle Time

Know who to address your urgent orders to

The Purchase Order Cycle Time is a procurement KPI that covers the end-to-end ordering process, from the moment a purchase order is created to the order approval, receipt, invoice and finally payment of the order. It focuses on the order and does not include the creation and delivery of the product or material itself. On our illustration aside, we see that the cycle decreased to 3,9 days at its minimal in March 2017, before increasing up to 6,3 days in June. The suppliers are divided into three categories classifying their purchase cycle time: short (4 days or less), medium (5 to 8 days) or long (over 8 days). This is a factor to take into account when purchasing: if the order is urgent, you may need to know which supplier is able to handle it quickly.

Performance Indicators

Reducing your cycle time can improve the turnaround of other key activities, and improve staff productivity and the overall cost of the procurement function.

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data visualization of the procurement metric supplier availability

Supplier Availability

Measure your suppliers’ capacity to respond to urgent demand

The supplier availability is a procurement KPI that refers to the number of times goods were available on the supplier’s side, or to the number of orders placed with the supplier. In an era of fast-changing consumer habits, where the lines between different channels are blurred, and where mobile-commerce, online purchases, in-store consumer-specific marketing all merge in one retail experience, it is important to manage suppliers as efficiently as possible to guarantee availability of stocks. By monitoring the evolution of your supplier’s availability of stocks, you know the degree of reliability you can place in them.

Performance Indicators

Maintaining your supplier’s availability over 90% ensures a good functioning of your supply chain and a greater level of efficiency.

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stacked column chart of the supplier defect rate

Supplier Defect Rate

Evaluate your suppliers’ individual quality

This is a procurement KPI that is crucial when it comes to determining the final quality of a product. It measures the percentage of products received from suppliers that do not meet the compliance specifications and quality requirements. The Supplier Defect Rate is more critical in some industries that have high-risks and multi-tiered supplier bases like the aerospace and defense or the automotive. Tracking your different suppliers’ defect rates and break it down into defect type will provide you insights on which supplier is more performant and reliable than other, and what type of errors are done. On our example aside, it is obvious that the first supplier is more reliable than any of the five others: within the 1% of defective goods supplier 1 has, 80% of them still have no impact.

Performance Indicators

Measure and track the different defect rates amongst your suppliers and identify the ones that are performing best and that are the most reliable.

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see rich examples of interactive real-time kpis in datapine view our live procurement dashboard
data visualization of the procurement kpi lead time in days

Lead Time

Measure the total time to fulfil an order

Our next procurement KPI measures the interval of time between the initiation of a procurement action, and the receipt of the production model into the supply system, purchased as a result of such action. In other words, it is the latency between the initiation and the execution of a process. It is composed of production lead time and administrative lead time. For instance, the lead time between the placement of an order and the delivery of printed circuit boards from a manufacturer can span from 2 weeks to 3 months, or sometimes more. Lead time is different from purchase order cycle time as it starts when the request is made till the final delivery and testing, while cycle time ends at the confirmation of the order. Set a target amount of days under which the lead time should stay; if you see that it repeatedly fails it over time, measures should be taken.

Performance Indicators

The idea is to reduce lead time as much as you can while keeping a good quality level.

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line chart showing the development of the cost of a purchase order

Cost of Purchase Order

Control the costs incurred by each purchase

The Cost of Purchase Order is one of the disputed procurement KPIs, as the definition and application vary. In theory, this metric represents the average costs of processing an order, from purchase creation to invoice closure. In practice, the costs to process internally the purchase order can include a staggering list of variables, and depending on studies, can range from $1,34 to $437... So, when measuring this metric, it comes down to what you decide to consider: what is the average cost to process a purchase order, based on how long it takes to do so, by the staff directly or indirectly involved. On our example aside, we have an average of (13,144/804) €16.34, which is within the studies’ range.

Performance Indicators

The idea is to improve the efficiency of the procure-to-pay cycle, so as to prevent errors and reduce costs.

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charts showing details of the procurement cost reduction

Procurement Cost Reduction

Streamline the tangible costs savings

Cost reduction is central amongst the procurement KPIs of our cost management dashboard. It wants to measure the tangible “hard savings”, that you have performed in terms of cost management over the years. You can easily measure them by comparing directly the old costs versus the new ones for the same good or service. On our illustration aside, we see that it went from €260k up to €480k five years later. It also breaks down the cost reduction by supplier category (switches, battery, display, etc.) and we see that the transistors’ section has the highest savings. There are a lot of best practices to adopt to reduce the costs: you can streamline your supplier lifecycle management, increase efficiency by leveraging supply chain analytics, or train your staff on how to save costs. It is a key metric for top management as it has direct influence on the income statement.

Performance Indicators

Monitor your costs reduction over time with the purpose to increase it in the long-term.

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data visualizations of the procurment kpi cost avoidance

Procurement Cost Avoidance

Avoid potential extra costs in the future

The second last of our procurement metrics focuses on the actions undertaken to reduce potential future costs, like replacing parts before they fail, and inevitably damage other parts. It is sometimes referred to as “soft savings” by opposition to the “hard” ones, since they do not directly appear on the bottom line in a quantifiable way, but can still have a positive impact. It can be neglected by the top management since it doesn't directly affect the income statement. Cost avoidance creates important strategic value as it often targets strategic spend like new investments or technologies that have no comparable purchase for instance. As you can see on our example, it is calculated as a percentage that can be broken down into the different categories of suppliers, that you can track alongside the cost savings performed, to better measure the impact of your efforts.

Performance Indicators

Develop a strategy to map your cost avoidance internally and combine it with the cost reduction.

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column chart showing the procurement ROI by supplier category

Procurement ROI

Determine the profitability of investments in your procurement department

Last of our procurement metrics, Procurement ROI is however not the least. The Procurement ROI differs from the regular ROI usually calculated with the formula ROI = (Gain from investment – Cost of investment) / Cost of investment. For many professionals of the sector, it is the most important of all procurement KPIs, but it is not the single best and should be analysed alongside other metrics to have the big picture. To calculate the Procurement ROI you need to divide the annual cost savings by the annual internal cost of procurement, and express it as a ratio. It is a good single metric but of course does not speak for the broader “scorecard of supply”, and does not include cost avoidance. Besides, if the procurement investments are too low, you are more likely to measure the hard cost savings mainly, without the avoidance and other value chain improvements.

Performance Indicators

Procurement ROI should have a massive payback, and setting it 10 times higher than the internal investments for the procurement department is a good target.

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