It’s not easy to figure out how to reduce costs in your company. The key is to take a systematic approach to controlling what you spend. That is why today we will share some KPIs to reduce costs that will surely be very useful to you.
The first step is to examine expenses and accounts payable to see what the costs are tied to. You can start by analyzing data from the last couple of years to identify the main sources of expenses and see if they have changed.
But what KPIs should I monitor?
Examples of KPIs to reduce costs
Monitor these kinds of KPIs for a purchasing department and measure the effectiveness of your efforts to date:
1. Annual savings
Cost savings are achieved by eliminating ineffective processes and agreements with suppliers. To get a good idea of how well or how poorly your purchase investments are paying off, you need to track your annual savings.
Tracking these types of KPIs to reduce costs will give you an overview of your purchasing department. Of course, you’ll have to dig even deeper into the data to see exactly where you’re cutting your costs. This way, you can also find out which areas need more attention.
2. Unforeseen expense
Unforeseen or unplanned spending is a major problem in most organizations. Many employees admit that they have made purchasing decisions without going through the proper authorization channels.
For your organization to be as profitable as possible, you must reduce all unnecessary expenses. The more you make progress in controlling expenses that aren’t necessary or approved, the healthier your bottom line will be.
3. Supplier management
How many suppliers does your company work with? Best practices indicate that the fewer suppliers you work with, the more likely you are to get good deals.
By controlling the number of suppliers you work with and figuring out how you can get lower prices, you can save considerably while streamlining the purchasing process.
These types of cost-reducing KPIs are especially important for organizations that have recently undergone mergers or acquired other companies. So review these metrics for evaluating suppliers so you can decide which ones you can stick with.
4. Cost savings
Tracking savings, either by project or over a period of time, allows you to see where your efforts are working most effectively and what other areas need more attention.
Track supplier expenses and create projections for projects of a certain size or time period. Next, dive into general cost reduction strategies for those projects. Over time, you’ll gain key insights on how to replicate and save more in the future.
5. Avoided expenses
To understand the real ROI of your shopping investments, you need to consider how much money you’re saving overall. But you also have to determine how much overspending you’re avoiding by optimizing purchases.
6. Prices and compliance with contracts
Negotiating extremely favorable terms won’t get you very far if you don’t take advantage of all the discounts available. Likewise, if a supplier doesn’t hold up their end of the deal, you may be able to negotiate for lower prices.
To optimize expense management, you should pay attention to whether you always take advantage of favorable payment conditions. By monitoring these types of KPIs to reduce costs, we also ensure that contracts are fulfilled.
7. Contribution of each area to total expenditure
Some departments or business functions use more resources. In this way, by monitoring your KPIs you will be able to know where you should focus most of your energies to improve purchasing efficiency.
In an ideal world, you could invest money in improving your organization’s purchasing strategy and this would translate into cost savings.
How to monitor KPIs to reduce costs?
Each organization has different needs. By tracking these KPIs to reduce costs, you will increase your chances of getting the results you are looking for. With more data at hand, you can further refine your purchasing strategy to reap even greater dividends.
The KPIs above are not the only ones that exist. Make your own list based on your organization’s goals. Constantly ask yourself: “How many KPIs do I analyze and use for reporting? How many actually help me track my progress toward my goals? «
If you’re spending too much time creating a KPI report with data that’s not moving your procurement team forward, it may be time to reevaluate priorities.
Avoid using metrics and KPIs that are not useful for your business and decide to improve your processes by having a better visualization of what is spent.
A digital expense dashboard is an excellent option because it allows you to monitor connected data from various sources to have a better understanding and analysis of the inflows and outflows of your capital.