Every well-managed procurement department is going to have cost-savings as one of its goals. It’s easy to get caught in the trap of always trying to negotiate better pricing from your vendors. But is that the complete, well-rounded solution to maximizing cost savings? Even if you have highly skilled negotiators on staff you are probably falling short of your potential. It’s not enough to do one thing well. There are many things that need to be addressed. Examining key performance indicators (KPIs) can help your purchasing department focus in on the areas that will make the greatest impact and maximize cost savings for your business.
Total Cost Savings – This is where all the attention generally lands with discussions about procurement. It measures the total about of money saved from year to year. These are numbers, facts, and figures that can be directly attributed to the P&L statement. It has a direct impact on the financial success fo the company.
Managed Spend as a percentage of Total Spend – Managed spend is the amount the purchasing department influences directly through its sourcing and strategic decisions. Total spend is what it sounds like – the total amount of money spent each year excluding labor. The idea is to get the amount of spend under management to increase as a percentage of total spend.
Percentage of suppliers accounting for 80% of the spend – We’ve all heard the 80/20 rule. This KPI looks at how consolidated your suppliers are. It’s not uncommon to have about 20% of your vendors get 80% of your spend. This can be tracked from year to year, but new product introductions or changes in sales will effect this number.
Contract Compliance – You want to look at contract provisions, pricing agreements, terms, and conditions and see how well everything stays true to what is outlined in all the contracts.
Cost Avoidance – Prices go up, that’s a given. Your actions can result in a supplier delaying a price increase. This results in a spend that is lower than it would have been. Or maybe you add additional services or training without paying additional costs for those things.
Implemented Cost Reduction Savings – These are real savings that have been finalized and implemented. They have moved from the theoretical paper world into the real world of changing your costs.
Procurement ROI – One way of measuring the purchasing department’s effectiveness is to compare the implemented cost savings to the operating budget. This would be another number to track over time and watch for improvements.
Quality – In manufacturing you look at Defects Per Million (DPM). This is a number you want to see go down over time to show quality improvements. But service businesses need to be concerned with quality as well though that number is a little harder to define.
Delivery – The bottom line here is ensuring every department gets what they need when they need it. Does the promised date line up with the scheduled date of delivery? Do they both match the actual delivery? Businesses with enough volume can also track this as an overall percentage of on time shipments.
Procurement Cycle time – How long does it take from the time a requisition is submitted until the order is placed? This can be measured, tracked and improved upon.
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