For a company’s purchasing function, distinguishing KPIs, or key performance indicators, from “simple” indicators is important. In this case, purchasing management indicators are related to the company’s strategic objectives and are chosen to focus the purchasing team on actions that have an impact.
Let us remember that indicators can only become KPIs if they track progress towards the organization’s objectives. Thus, monitoring indicators that are not linked to objectives is useless.
This naturally leads to the next question: “What purchasing KPIs are relevant to achieving objectives?”
What is a purchasing area indicator?
Purchasing indicators are those that are used to monitor the performance of the activity of this area, that is, to measure it and act to adjust it to the objectives of the organization, and to report to interested parties, that is, general management. of the company, internal customers, etc., of the management of the purchases that are made.
A purchasing indicator is selected based on the objectives and can be displayed on a dashboard. Thus, in general: the purchasing director has a global dashboard of the main indicators.
Types of purchasing indicators
An indicator, if associated with an objective, is a performance measurement tool. Hence we can classify purchasing indicators into 2 types: effectiveness indicators and efficiency indicators.
- Effectiveness indicators: Effectiveness indicators compare the results achieved with the set objectives, that is, here we will compare a performance achieved with a performance objective. For example, the actual amount of expenses compared to the budget.
- Efficiency indicators : The other way of considering performance is efficiency, that is, the results obtained in relation to the resources used. An organization is efficient if it achieves its objectives by optimizing the resources used. In some cases, this second type of indicator is much more powerful, since it reveals the ROI of the purchasing function and allows its contribution to the company’s overall strategy to be measured.
Examples of purchasing management indicators
Below we present KPIs for a purchasing department that will be very useful to you:
1. Purchasing efficiency
Purchasing departments cannot drive business efficiency if they themselves are not efficient. Therefore, controlling our own efficiency must be a priority.
Savings are often presented as one of the purchasing management indicators, but rather it would be a “ vanity metric”, that is, an indicator that flatters the ego, but is of no use. Because? Because this indicator does not take into account the effort (money) that is invested in these savings, nor the other possibilities that are left aside.
- Purchasing ROI : Beyond the total savings achieved (cost reduction, avoided costs, or both, depending on your organization), what is the result in relation to the total internal cost of managing the purchasing team?
- Spend management : What percentage of spend is managed directly and actively by the purchasing team? What is the breakdown of direct and indirect expenses? What is the breakdown of expenses by category?
2. Contract/Price Compliance
The best deal means nothing if suppliers don’t deliver once they’ve signed.
Measuring the percentage of suppliers under contract is also not considered one of the most significant purchasing management indicators, but rather a vanity metric.
The purchasing department should establish key performance indicators to monitor suppliers against their commitments.
- Performance Pricing vs. Contract Price : How many purchase lines are billed above the prices indicated in your contracts? What percentage of spending does this excess represent?
- Average delivery/execution time: What percentage of deliveries are on time based on service level agreements? For late deliveries, what is the number of days after the deadline that deliveries are received?
3. Compliance with policies and processes
Suppliers are not the only ones that the purchasing department must control. Internal purchasing habits must also be taken into account.
- Purchases with or without a contract : What percentage of spending goes to unnecessary purchases without a contract when a contractual alternative exists? How much money would you have saved by purchasing contract equivalents instead?
- Purchase/order cycle time : How many hours are necessary between a purchase request and the issuance of a purchase order, and how many more hours are necessary before the purchase order is issued to a supplier?
The purchasing management indicators that we share with you are not the only ones, you can make your own list based on the objectives of your organization .
However, ask yourself the following general questions: “How many indicators do I analyze and use for regular KPI reporting? How many actually help me track my progress toward my goals? «
Dashboard for purchases
If you’re spending too much time reporting on metrics that aren’t moving your procurement team forward, it may be time to reevaluate priorities and decide to get a better view of the information your business generates.
Avoid overanalyzing metrics that are not useful for your department and optimize this process with the help of TuDashboard.
Our software allows you to track your purchasing management indicators and any other indicator in your organization, linking data from various sources in real time so that you know what is really happening and make the right decisions.
Perform better analysis of your information from the purchasing department and any other area of your company with the help of a data dashboard.