Part of the problem is a lack of understanding of key performance indicators compared to metrics, and the role each plays in staying on track.
Procurement teams have a wide array of metrics at their fingertips, and we would do well to figure out the best way to use them. (Update:Let's continue this review with a few examples of valuable KPIs)
Defining These Terms‘Metrics’ and “KPIs’ are used interchangeably as terms, although this is a mistake. Let’s start by defining both.
Metrics are measurements used to quantify activity, no more and no less. They don’t care about external factors, focusing only on a snapshot of the here and now. They’re objective statements without context, and they are everywhere – anything we do could tie back to dozens of metrics if we tried to map them out.
Alternatively, key performance indicators require context. We establish and track KPIs in order to speak to specific business goals, marking progress objectively and measurably. Anything can be a metric but very few things can be (should be?) KPIs – otherwise the “key” in “key performance indicator” is meaningless. If we go about focusing on every metric possible, we really aren’t focusing on anything and might as well be reading tea leaves when it comes to forecasting results.
Procurement-Based KPIsThe number of suppliers we work with is a simple metric. At any given time, you can measure this number and where it moves. However, does this metric tell us anything by itself? Stated another way, is there a “good” or “bad” number of suppliers to maintain relationships with? No. Where this metric gets interesting, however, is when we tie it into specific goals. For example:
- Cost Reduction. Consolidating spend to fewer suppliers helps us build leverage when negotiating better pricing and terms.
- Risk Reduction. Expanding critical component suppliers and the logistics partners that ship them helps ward off supply chain disruptions.
Simply monitoring metrics around the number of suppliers in play doesn’t tell a whole story around either goal. So, what KPIs will help us achieve track against them? Tracking spend under management ultimately feeds into controlling costs. Tracking supplier availability and the ratio of emergency purchase needs speaks to reducing risk. Dozens of other metrics could serve as KPIs here, but the goal isn’t to shoehorn every one of them into our analysis. Instead, focus on identifying only those measures that speak to progress towards these goals.
This Distinction MattersProcurement teams are scrambling to make sense of the influx of data available to them. Too often, they don’t see the forest for the trees and treat every metric as if it was the same as a KPI.
The difference is intent. Don’t try to track everything the data supports, track performance against a set goal. So, how well are you differentiating the two?
Don’t Read Tea LeavesAn interest in understanding KPIs is a good start, but confusing any random metric for a KPI could take a good intention down a bad path. Think about your high-level goals for the next 12 months. Then, bullet out a list of all the metrics you collect and review on a weekly basis.
- How many of those bullets actually measure progress?
- How many are vanity measurements that say very little (but look very good in a report)?
- How many end up being completely unrelated to your goals for the year?
Odds are good that we all spend more time worrying about irrelevant metrics than we recognize. This needs to change if we’re to improve ourselves and our organizations.