How to measure the effectiveness in procurement? Don’t be afraid of KPIs!

Nowadays almost every excellent and well-functioning organization bases its strategy on setting up and measuring KPIs (Key Performance Indicators). Surely, every company does it in a different way, but the goal is always the same: stay compliant with the company business strategy. And there is no reason to be afraid of KPIs as your work with reasonable KPIs will be just more effective and easier. It’s good to know that there are 5 conditions of good KPIs – SMART.

• Specific – it has to be clear what the KPI exactly measures.
• Measurable – the KPI has to be measurable to define a standard, budget or norm
• Achievable – nothing is more discouraging than striving for a goal that you will never obtain
• Relevant – the KPI must give more insight in the performance of the organization in obtaining its strategy.
• Time phased –  every KPI only has a meaning if one knows the time dimension in which it is realized.

Additionally, some companies use goal cascading method. Meaning that there is a main objective for the whole company and then the objective is cascaded to particular departments according to their role and finally to particular teams or employees. This method makes employees go towards one common goal.

Coming back to our favorite procurement area, let’s picture the following situation (the case study has been derived from the KPMG blog post).

A company ABC made a decision to implement some changes in the procurement area. The goal was to change the approach from the administrative one into more strategic one. Having done research, there were defined 3 aspects which need to be improved:

• lack of supplier management process standardization
• ineffective processes of gathering purchase requests and orders, insufficient  process standardization and automation
• high employee attrition rate

There was created a KPI map, taking into account not only cost effectiveness, but also team, process and supplier management effectiveness.

Here are 3 main areas of measuring effectiveness in procurement .

COSTS

Working on cost optimization in procurement teams, we need to focus on order standardization, implementing  e-catalogues and an effective IT tool. Certainly, the main indicator will be generated savings, but it’s necessary to monitor the number of tenders, negotiation time, number of sent RFx or gathered purchase requests. It will be extremely difficult and time-consuming to track it in Excel sheets or in emails, that’s why introducing a reliable tool will be a great solution.

PROCESS

KPIs which reflect the quality of supplier management processes allow to identify bottlenecks and introduce contract standardization or RFx templates. It’s good to monitor indicators, such  as: turnover for the top 5 suppliers, the average value of orders by a supplier etc.

TEAM

The team engagement indicator turns out to be necessary in relations with the suppliers, working with reliable business partners and supplier management process. The value of the purchase by an employee in a procurement team is a critical indicator in that case.  The indicators, such as buyer average turnover or buyer average order value may be also really helpful.

Every organization defines different methods and tools to measure effectiveness. One uses Excel files, other performance management platforms, some decide to integrate the procurement process with effectiveness indicators in one solution (for example in NextBuy). An elaborated report module allows to monitor effectiveness, download reports and compare the results with the benchmarks.

Hope we managed to inspire you to set up and measure KPIs reasonably. Stay calm and track your KPIs!