If you can’t measure it, you can’t improve it, as the saying goes. Which is why those in the procurement space keep a sharp eye on the best procurement metrics for measuring their performance. Here we’ve pulled out our top 10 metrics that matter in 2021. Though before we get into those details, let’s have a quick recap:
What is procurement?
In simple terms business procurement is the process of locating and acquiring goods and services from external sources for the business to use. Procurement activities include planning, sourcing, and negotiation, along with risk management, legal and value analysis. This is often managed with the help of supplier management software or inventory management software.
While many businesses are interested in procuring the best quality goods and services at the cheapest price, cost is not the only procurement factor. Contemporary business procurement has evolved and is now largely value-driven. The aim of purchase management today endeavours to create business value by establishing multi-dimensional and collaborative relationships with business suppliers.
One challenge of modern purchase management is that many organisations lack a formal company-wide strategy to achieve value through their procurement activities. This makes it hard to determine if procurement is contributing to company objectives and if so, how that contribution is measured.
A robust procurement strategy should explain how an organisation seeks to optimise the businesses external spend, procurement costs and other value contributions such as product innovation, spend reduction and process efficiency.
Purchase management improves profitability by helping to reduce raw material costs, streamline processes, and identify better sources of supply. Therefore, it is important for businesses to develop and implement a procurement strategy that is aligned to the overarching corporate strategy and its objectives.
Procurement in 2021 and beyond
In the 12 months since the Covid-19 pandemic began, businesses have been in crisis mode and procurement managers have been no exception. The pandemic’s global scale exposed largely unprecedented, supply chain vulnerabilities. However, crisis management is now transitioning into recovery, with some signs of growth returning, and five common themes emerging for procurement in 2021:
- A focus on risk management and social value growth, although cost optimisation will remain a priority
- People at the forefront; ensuring the wellbeing and support is there for employees to adapt to new working styles and capabilities to succeed in 2021
- Accelerating value capture by leveraging digitisation, supplier management software, and spend analytics
- Recalibrating cost-saving targets through zero-based category and value-creation strategies
- Creating new opportunities by investing in supplier partnerships and joint innovations
Of course, the emphasis on each priority will differ depending on the industry. For example, industries like transportation and logistics, technology or consumer goods will focus more on supplier collaboration. Those in the financial services and agricultural industries are set to transform functions through accelerating digital technologies and spend-analytics to deliver new opportunities. Traditional heavy industries, such as oil, gas, chemicals, and advanced materials will navigate major cost challenges resulting from a significantly reduced demand.
To be successful in any aspect of a business it is important to be proactive about planning and that is undoubtedly true when it comes to procurement strategies for both the short and long term. While it is difficult to account for every possible scenario, the Covid-19 pandemic has indeed provided an opportunity for businesses to rethink their procurement strategies after globally connected supply chains were repeatedly disrupted. That’s where Procurement Metrics and Key Performance Indicators (KPIs) come into play.
Procurement metrics & KPIs
Procurement metrics and KPIs allow organisations to measure results and guide best practice performance. Metrics and KPIs should be viewed from the broader process level and include such areas as strategic sourcing, supplier management and compliance, logistics and contract management. Here are our top ten top procurement metrics and why they matter.
1. Undamaged shipment rate
The undamaged supplier shipment rate measures the consistency with which suppliers deliver undamaged goods to your business.
The metric is measured by taking the total number of undamaged orders received from suppliers and dividing it by the total number of orders received by that supplier over a set timeframe and multiplying it by 100 to arrive at a percentage.
(Total amount of undamaged orders received / Total of all orders received) x 100
The undamaged supplier shipment metric can be used as a KPI to determine if the cycle time for the deliveries to customers is increased when the damaged shipment rate is high. Alternately, the metric may indicate that the business has failed to create standard obligations for supplier shipments such as setting packaging standards for shipments as part of the supplier contract.
2. On-time delivery: all suppliers
On-time delivery metrics measure the time from when the order is shipped by the supplier to when it is receipted by the business. The on-time shipping rate focusses on improving services and is a key indicator of customer satisfaction.
The metric measures the percentage of suppliers that deliver some late shipments and those with none. The higher the on-time shipping rate, the more efficient the supply chain.
(Quantity of on-time shipments / Total shipments) x 100
This KPI aids in setting benchmark shipping times relative to each supplier and allows organisations to optimise forward shipping and delivery processes for their customers, reducing turnover time, and improving customer satisfaction levels.
3. On-time delivery: single supplier
The on-time delivery rate shows the percent of items or order value that arrive on or before a requested ship date. Comparative to on-time delivery on all deliveries, the single supplier metric goes an extra level to determine the delivery reliability of individual suppliers.
(On-time orders / all orders by a single supplier) x 100
A high percentage of on time delivery is indicative of an efficient supply chain. This performance measure is key to customer satisfaction because a low rate can negatively affect order fulfilment. Meeting sales order demand is crucial for customer retention.
Maximising your warehouse space and efficiency is not an easy feat — but it is important if you want to unlock procurement efficiencies.
4. Warehouse space utilisation
Keeping warehouse costs low begins with well-informed data on the warehouse facilities processes and operations. Warehouse space utilisation is a measure of how efficiently your warehouse costs are being managed. Warehouse space utilisation is determined by adding up the volume of all items that are stored in the warehouse and dividing this by the total warehouse storage space.
(Square meterage used / total square meterage) x 100
Costs can vary from warehouse to warehouse, but it is important to measure and regularly review this metric to identify opportunities for cost reduction. Reconfigure the warehouse to take advantage of every inch of available space and maximise storage capacity by making use of any vertical space.
5. Raw materials cost as a percentage of COGS
This measure calculates raw material costs as a percentage of the cost of goods sold (COGS) divided by the total COGS borne over the same period, as a percentage. Do not include indirect raw materials or other indirect expenses when calculating this metric. This measure can be applied to determine the efficiency of procurement processes and where improvements can be made.
(Direct raw materials expense including direct labour / total COGS) x 100
High raw material costs could indicate you are simply paying too much for your raw materials. However, it may also be low-quality materials that create rework or high scrap rates. Conversely, high raw material costs can signal an over-purchasing of raw materials due to inaccurate demand forecasting.
There are many ways to reduce your raw material costs such as employing continuous improvement techniques, negotiating discounts with suppliers, or implementing supplier management software to identify opportunities for cost reduction. The single best way to optimise demand forecasting and avoid excess raw materials inventory is by using inventory management software.
Calculating how much you spend on procurement can identify bottlenecks and areas for improvement. This ensures you have a more informed decision-making process in future
6. Spend under management
Spend under management is an overall measure of how much spend a given company moves through its procurement department. It refers to the practice of comprehensively managing every supplier relationship and each dollar that is spent on company purchases. Best practice spend management integrates and automates all procurement activities from source to settlement.
Spend under management gives the organisation the visibility to have greater control over spend and helps procurement reduce potential risks. This systematic view ensures that buying happens as planned and supplier payment complies with contracts.
The benefits of best practice spend management include greater efficiency through automation and digitisation and more effective collaboration between supply partners. It also helps to reduce supply costs and risks because you know exactly what is being bought, from where and at what price. Ensuring greater competencies through informed decision-making.
Spend management can be aided by technology such as online inventory management and supplier management software that improves spend analysis and sourcing activities.
These tools will digitalise sourcing, contracting, and procurement processes, as well as manage suppliers, invoicing, and payments processes. Consolidating these tasks into one simple, cloud-based platform that integrate with the digital business network enables the business to collect and analyse all spend data for a meticulous insight into company spend across the complete organisation.
7. Proportion of competitive spend
Calculate your proportion of competitive spend by taking your advertising spend for a budgeted period and dividing it by the total of all market advertising spend for the same product or category.
(Advertising spend / entire market spend in same product or category) x 100
Determine the portion of spend is put out via a request for proposal (RFP). RFP documents are an essential part of the procurement process for companies interested in the procurement of a product or service. An RFP document lists out the scope and all requirements of a competitive spend campaign and is used to announce the new project opportunity through a bidding process.
In simple terms, an RPF can be compared to a design or creative brief presented to marketing agencies to source creative content, graphic design or branding and promotional materials.
Understanding competitive spend and the RFP processes are importing to determine goals and how to measure the project’s success. This metric also guides KPIs for the purpose of measuring return on investment.
8. Proportion of digitally enabled suppliers
Technology is reinventing supply chains and knowing the proportion of your suppliers that are digitally enabled is a useful measure to track. The Covid-19 pandemic has highlighted how digital supply chains are crucial to maintaining business continuity and efficiency.
(Digitally enabled suppliers / total of all suppliers) x 100
Integrated software systems and supplier management software enables seamless information sharing, removes bottlenecks and provides a holistic view of the supply chain. Therefore, it is important to digitise your supply chain because technology drives integration in and between organisations, enhancing visibility across supply chains from end to end.
9. Corporate social responsibility
Corporate purpose and social impact drive business value because consumers are largely attracted to brands that share their values. Values such as fairness, integrity, and social responsibility. Organisations consequently have a vested interest in implementing procurement policies that support these views.
Corporate social responsibility (CSR) can be demonstrated through such things as green procurement efforts, ethical sourcing, and environmental sustainability. But how do you measure the success of CSR?
Calculating the return on investment for CSR programs is done in a similar method to those used to measure the effectiveness of marketing campaigns. Firstly, determine short-term and long-term goals and measurable KPIs. Calculate value and track results by collecting data to gain insights on whether CSR objectives are being met.
Successful CSR practices provide benefits to the community and the environment, but they also help to drive business growth. If done well, CSR builds better brand recognition, good reputations and better financial performance through increased sales and customer loyalty.
10. Supply chain cycle time
Supply chain cycle time is the sum of the longest lead-time it would take to fill a client order if inventory levels were at zero. This includes the time undertaken for procurement processes, waiting time, shipping, and order fulfilment.
The benefit of understanding this critical metric is that it exposes pain points or uncovers competitive advantages. Supply chain cycle time shows the overall efficiency of the supply chain. Long cycle times hint at a tedious and clumsy supply chain while with short cycle times are an indication of an efficient and agile supply chain.
Measuring procurement performance
Procurement metrics and KPIs measure operational effectiveness, productivity, and the cost of sourcing goods and services from suppliers. Implementing effective spend analysis into procurement processes will help organisations to achieve full visibility of their procurement spend.
Metrics help to identify savings opportunities, manage risk, and streamline procurement activities across business units. They can also be used to improve supplier relationship management, evaluate supplier performance, and ensure compliance.
Having a clear picture of your procurement costs, business needs, and market conditions will help to inform realistic short and long-term goals for businesses over the coming year.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.