The following blog comes to us from Jessica Barrett Halcom of TechnologyAdvice.com
Data is everything for today's Procurement teams. With quicker and more robust tools at their disposal, more organizations than ever are recognizing that the need for utilizing spend and performance data to drive decision making and develop competitive advantages.
But what does Procurement do with all of that data? Collecting it is just the first step. What really matters is how its used. Procurement teams well know that their efficiency is dependent upon systematically and effectively analyzing their data.
To make data work for you, it’s critical to set up metrics whereby you can measure your key performance indicators (KPIs). How do we know which metrics to use? There are several that every leading Procurement departments pays close attention to.
Spend Under Management
Possibly the most common metric Procurement teams talk about is spend under management. This is because it reflects how closely the team follows its sourcing schedule, the number of active contracts they have in place, and the documentation of expenditures on requisition orders in a given fiscal period. When the Procurement department has more control in this area, it’s able to make better decisions, which leads to a cost reduction overall.
Cost savings are one of the most obvious and critical metrics Procurement is measured against because it’s a direct reflection of how they’re impacting the bottom line. There are several things that can be factored in as we consider cost savings outside of purchase price, such as indirect costs that include things like Total Cost of Ownership. This looks at costs like maintenance, end-of-life disposal, and replacement expense.
Procurement Cycle Time
Cycle time is another common metric that Procurement teams are measured against. It begins at the time of purchase and ends when products are delivered to the warehouse. When the cycle time runs smoothly, it suggests that purchasing process are running as they should and truckloads are reaching their destination on time. A quick cycle time enables companies to sell those products sooner, and may also present the opportunity to receive discounts by paying their suppliers earlier. Slower cycle times, however, mean lost revenue and savings.
Finding suppliers who will sell the best materials at the lowest rates affects more than just the quality of your inventory. Procurement managers who build strong relationships with dependable suppliers will make better quality purchases year-over-year and enjoy the benefits of a Procurement process that isn't drawn out due to returns or defective products.
Procurement Team Return on Investment (ROI)
Like IT, Human Resources or Accounting, Procurement is a non-revenue generating department. Therefore, to measure its ROI, organizations compare its costs to the savings it helps produce. This means looking at operations; labor, wages, supplies, and technology against the amount of money the department is saving the organization overall.
This area can be a tough one depending on who your department heads are and how rogue they like to get with their spending. When you have departments going off-contract to make purchases your Procurement department isn’t aware of, not only can spending get out of hand, but it can actually hurt your reputation with contracted suppliers and make future negotiations more difficult. Procurement teams should be encouraged to work closely with department heads to ensure that they understand the importance of contract compliance. Using a customer relationship management (CRM) tool with built-in contract management features (find recommendations for great CRM products here) can help everyone across the organization keep contracts in a central location.
Procurement teams involved in supply chain operations are typically measured against on-time delivery. This essentially measures whether or not shipments are getting to their destinations at the time they need to. In addition to on-time delivery, they’re also measured against the percent of shipments arriving in usable condition and quoted delivery time versus actual delivery time. Additionally, some teams are measured against things like line shutdowns due to late deliveries and the subsequent costs incurred.
Supplier Count Per Category
Though a little tougher to determine, there is generally a “sweet spot” number for how many suppliers a company should engage within a given spend category. Engaging too many suppliers makes it tougher to build relationships and negotiate better pricing, however, too few can create unnecessary risk (there are exceptions such as employee health insurance or a temporary staffing agency). Procurement teams should be familiar with existing contracts and market trends to help them determine the right number of suppliers in each category.
Having heightened visibility into your data is critical when it comes to understanding how your procurement team is performing. Using these key metrics positions your team to continue adding value across various business units while positively impacting the bottom line for the entire organization.