Procurement KPIs to boost Teamwork & Performance
Have you ever heard the proverb, “What gets measured, gets managed”? This famous quote is very popular among businesses, and for good reason.
In procurement circles, this statement holds true. Procurement leaders have to make sure that their teams are driving value and saving costs, and taking measurements is a crucial component of achieving this.
But measuring has to be done correctly in order to acquire the necessary data to make intelligent decisions that improve the procurement process. This means picking the right array of metrics and KPIs, and having a single point of truth with master data.
We’re here to help you do that, by presenting you some of the most important metrics and KPIs for procurement success.
Let’s dive in!
One of the most important things that your company can measure is the performance of your team. When your team is inconsistent, fails to meet expectations, and simply doesn’t perform as well as it could, you’ll see lower results in KPIs all across the board; from financial KPIs to delivery and quality KPIs. That’s why making sure your team performs well is as important as it gets.
But when measuring your team’s performance, which metrics should your company look for?
Here are what we consider to be some of the most important metrics when measuring your team’s performance:
Employee Engagement Level
Even though Employee Engagement is not a direct indicator of performance, it is still a very useful metric to measure. There is a strong correlation between productivity and employee engagement levels because engaged employees are more motivated, and thus work more efficiently and produce better results.
According to Gallup, teams with higher engagement levels are 21% more productive and have 28% less internal theft than those with lower engagement levels.
The numbers don’t lie.
Take action and measure the engagement of your team!
Why measure presence?
Well, presence is one of the most obvious and basic things to look for when evaluating your team’s performance. After all, your team’s presence is necessary to make any progress whatsoever.
Tracking presence is a bit tricky, but you can get in the right direction by asking yourself the following questions:
How often do employees show up? Or if you have remote employees - How frequently are they interacting with their company’s work collaboration tools?
For example, if your company uses a procurement collaboration workplace such as procurementflow.com, you can track how many interactions they make on a daily/weekly basis through the tool.
How many hours are they showing up in relation to the hours that they should show up?
Are your employees hurried to leave the workplace?
But presence is not just about being physically present. Presence is also about being mentally present, which means being involved in the problems and activities that your company is faced with:
Are your employees cooperative when a problem arises? Do they show up to lend a hand right away and propose solutions?
Another crucial metric to track is efficiency. Luckily, efficiency is not as hard to track in comparison to other team performance metrics. To measure it, find how much your team is getting accomplished in a given period of time. Doing this can help you find out which employees are doing an efficient job, and which ones are falling behind.
For example, to measure the efficiency of a worker who’s job is to process purchase requests, count the total number of requests processed, and then divide it by the number of hours that it took to process them.
Example: 10 requests processed / 8 hours = 1.3 requests per hour or 75 request lines processed / 8 hours = 9.4 lines per hour
If your team is present, and efficient as well, you’re on your way to a productive time. The only thing that’s left is to make sure that what they do is up to standards - quality-wise.
Which leads us to our next metric:
This list wouldn’t be complete if it didn’t include quality. Why? Because It doesn’t matter if your team gets a million things accomplished if the quality of its achievements is poor. Quality must be up to standards if your team’s efforts are to be worth something.
Unfortunately, team performance quality is a bit difficult to evaluate in procurement. Quality KPIs are usually easy to measure because they are often based on figures and numerical data, but as a team measurement, it’s a soft measure since it’s based on somewhat subjective opinions.
For example, you can measure the quality of your procurement team through assessments. Stakeholder analysis can be carried out to identify and evaluate how individuals within the organisation are carrying out their jobs and if they are meeting expectations.
Number of suppliers
Tracking the number of suppliers that your company can rely on is a good way to evaluate how dependent your company is on its suppliers. Having too few suppliers increases the risk of taking less than optimal offers or being tied with single supplier. With a wider variety of suppliers, you can get better offers and you can make different agreements that help your company save costs or attain supplies faster. On the other hand more suppliers means more administrative work so It is important to find right balance.
Amount of POs approved and processed electronically
Even though approving and processing purchase orders electronically is much more efficient, scalable, and reduces cycle times, there are still a lot of companies that use traditional methods such as paper and spreadsheets to process purchase orders or fulfil approval flow requirements.
According to APQC, top-performing companies approve more POs electronically than other companies. Your company should aim to do the same - increase the percentage of POs approved electronically as much as possible and that will release valuable time cross entire company.
Measuring the availability of your suppliers is important to guarantee that your supply chain functions reliably and efficiently. By measuring supplier availability, you can get an idea of the reliability of vendors, which helps you to make sure that there are stocks available.
Supplier availability is measured as a percentage. To find the availability of a vendor, measure the ratio of the number of times a supplier was able to supply you with the items requested to the number of orders made with that vendor.
For example, if you sent out 11 orders and the supplier confirmed 10 of them, the availability is 91%.
Average Lead time
For certain firms, such as engineer-to-order businesses and other companies that need to reduce time-to-market times, measuring vendors’ lead time is paramount. In many cases, lower lead times result in better customer satisfaction due to faster delivery of products, as well as in higher productivity, and fewer stockouts.
Lead time is the time it takes for a supplier to deliver goods from the moment an order is placed. You should calculate the average lead time of suppliers to more accurately predict how fast they’ll deliver supplies in the future. This metric is usually measured in days with the following formula:
Lead time = Delivery time - Order time
On-Time Delivery, also known as OTD, is an excellent KPI to measure the reliability of suppliers. By measuring OTD, your company can ensure timely deliveries, and consequently, higher customer satisfaction levels.
On-Time Delivery measures a supplier’s capacity to fulfil shipment orders within the promised delivery times. The higher the OTD performance of a supplier, the more likely that it will deliver supplies on time.
To calculate OTD, measure the ratio of shipments delivered on time to orders made. The result should be a percentage.
For example: If a supplier delivered supplies on time 3 out of 4 times, it’s OTD percentage is 75%. With OTD it important to set clear delivery window. Delivery window shows if supplier can deliver before delivery date and when delivery is considered as late delivery.
Compliance rate measures how often suppliers adhere to the agreements that they have with your company. Measuring this metric over time can help your company reduce costs and increase the quality of products because higher compliance means that suppliers will behave and cooperate as expected. A good way to increase compliance rate is by creating penalties to suppliers that don’t adhere with agreements.
The defect rate measures how many products or orders from a supplier don’t meet the requirements. This KPI helps to determine the reliability of the quality of a supplier’s fulfillments.
The defect rate of a supplier is measured as a percentage. To calculate it, measure the ratio of defective goods to the number of delivered goods.
For example, a defect rate metric called PPM (Parts per Million Defectives) is used to measure how many parts per million are not up to standards.
If a supplier has 73 defective units for every hundred thousand (73 / 1 00 000 x 1 000 000), it’s PPM is 730
Or if there are 10 defective parts out of 100 delivered, then PPM is (10/1 00 x 1 000 000), it's PPM is 100 000.
The lower the PPM, the better the consistency of a supplier’s quality.
Looking for a procurement tool to make your procurement team’s work a breeze?
Take a look at ProcurementFlow.com, a digital workspace and collaboration platform to bring clarity where it’s most needed. It keeps all supplier-related information in one single SRM (Supplier Relationship Management) system. It effectively maintains process status and uses a logical workflow to move procurement projects from one step to another. Collaboration between different functions is embraced and what is most important is that everyone in the team is always on the same page.