Measuring Purchasing Efficiency | Purchasing KPIs
Let us start with characterizing Key Performance Indicators (KPIs) :
As expressed by specialists, A Key Performance Indicator is a measurable value set that shows how effectively a firm is achieving its key objectives.
KPIs are important to make a concentration for operational and key improvements in a firm.
In the widest sense, KPIs can help provide the most important performance information that helps organizations to understand whether the firm is on track with its defined objectives or not. KPIs can be used to navigate, giving out a clear picture of the current performance levels as compared to the needs of the business.
KPIs help managers to communicate the mission and focus of the organization to its investors, team members, and other important stakeholders.
KPIs help reduce the complex nature of organizational performance, helping in making better and manageable decisions.
Some of the importances of KPIs are:
KPIs provide vital and quick information regarding the overall performance of the business to small business owners.
KPIs help to facilitate decision making in the organization
KPIs help businesses to measure how effectively they are achieving their goals.
At the point when a business has characterized its targets and techniques, it is simple for it to distinguish and incorporate KPIs which coordinate the best as indicated by the association’s prerequisite.
Purchasing divisions in any firm have been considered as wellsprings of cost investment funds, instead of wellsprings of significant worth creation and solid ROI for quite a while. Newer advancements have assisted with examining information assembled all through each procedure occurring in the association.
Although all work for the same, purchase departments of every firm are different, so creating personalized KPIs is important in today’s competitive business world to gain an edge over the prevailing market competition.
Some of the crucial Purchasing KPIs are :
- Compliance Rate
- Supplier Defect Rate
- PO and Invoice Accuracy
- Rate of Emergency Purchases
- Supplier Lead Time
- PO Cycle Time
- Vendor Availability
- Cost per Invoice and PO
- Price Competitiveness
- Procurement ROI and Benefits
- Spend Under Management
These Purchasing KPIs are normally divided into three main categories- Quality KPIs, Delivery KPIs, and Cost-Saving KPIs. All these KPIs are interrelated
Let’s start by defining the Quality KPIs
A) Quality KPIs:
These KPIs ensure that the quality on which the firm has agreed to work in its mission statement will not be compromised under any circumstances. Below are the Quality KPIs:
1) Compliance Rate:
Compliance rate in procurement/Purchase departments constitute to a whole lot of agreements a company and a supplier lay down at the time of making a contract. Policy compliance is essential to ensure the legal security of a firm. Compliance ratings determine the spending of the firm in legal areas. If they go down, legal expenses for a firm may increase significantly. A firm should always favor in creating an error-free purchase contract with clearly defining penalties and punishments when certain agreements aren’t followed. The Compliance rate KPI affects many other KPIs of the firm. This KPI keeps you updated about which suppliers are your trusted ones.
2) Supplier Defect Rate:
The supplier defect rate is used to evaluate defects in a specific supplier’s quality. It measures the percentage of products received which are not as per the promised quality. It is important to keep a check on the quality standards regularly. Evaluating the goods supplied against the actual quality promised helps us to find that is the supplier suitable or not. If the supplier defect rate is higher it is always advisable to change suppliers. Supplier defect rates are usually measured in millions in large firms. It helps firms to recognize the supplier’s trustworthiness.
3) PO and Invoice Accuracy:
Purchase Order is a legally binding document between a buyer and seller in which the seller agrees to provide services/goods in exchange for monetary returns. PO Accuracy is concerned with operational activities. Lower accuracy increases operational costs for a firm. Calculating this metric helps in determining whether suppliers are delivering what was ordered and if it was delivered at the right time or not. The percentage of wrong deliveries in the total number of deliveries done in a certain time frame determines the accuracy of the PO.
B) Delivery KPIs:
1) Rate of Emergency Purchases:
In today’s rapidly-changing world, businesses need to make unprecedented purchases to prevent their stock from being empty. By lowering the rate of emergency purchases organizations can ensure continuity, reduce risks in supply, improve procurement plans, and save costs. This rate can be measured by comparing the number of emergency purchases in a given timeframe against the total number of purchases. Lower rate of emergency purchases ensures that the procurement strategies in the firm are well defined and work is carried on accordingly.
2) Supplier Lead Time:
This refers to the amount of time that normally passes between the time an order is received by a supplier and the order is shipped by the supplier. This KPI starts from the time when the availability of a product is confirmed by the supplier and ends when the product is delivered to the buyer. This KPI is normally calculated in days. The lower the Supplier Lead Time, the faster the transformation of mere orders into delivered goods. The basic formula for calculating supplier lead time is
Supplier Lead Time = Delivery Time – Order Time
3) Purchase Order Cycle Time:
The Purchase Order Cycle time is an acquisition KPI that spreads up the whole requesting process from one end to the next including each movement like request endorsement, receipt, receipt, and a last installment of the request. This KPI directly focuses on the ordering process in the firm and not on the manufacturing or delivery of the final goods. The lower the purchase order cycle time, the higher the efficiency of the purchasing department of a firm.
4) Vendor Availability:
Vendor availability refers to an individual vendor’s capacity to respond to the firm’s urgent demands. This KPI is used to measure a vendor’s capacity to work on the urgent demands put forward by a firm. This helps organizations to determine which vendors are reliable and which are not. This KPI refers to the number of times an ordered product was readily available with the vendor, or the number of orders successfully executed by a vendor.
C) Cost Saving KPIs:
1) Cost Per Invoice and Purchase Order:
The cost incurred per invoice or a Purchase Order can change widely over different organizations based on their working style, their niche, and all other factors. This metric usually characterizes the average cost a company occurs in processing an order. Firms that rely on paper and pen made Invoice and Purchase Orders will have higher costs in the long term as compared to firms that have automated their invoicing systems with the help of newer technologies.
2) Price Competitiveness:
Price competitiveness refers to the competition/differences in pricings of different suppliers available in the marketplace. Price competition is necessary for a business firm to ensure quality. If there is no price competitiveness in the suppliers then the suppliers may start to act as a monopoly and the quality of the products supplied by them may reduce over time.
3) Procurement ROI and Benefits:
The total amount of capital a company spends on the procurement function should always be beneficial to it and should generate a reasonable return to keep the business growing. Calculating procurement ROI undermines comparing of departmental costs to the savings done by it. It is best suitable for the internal analysis of a firm.
4) Spend Under Management:
Spend Under Management is the total amount of spending approved by the management for a particular process/department. This is usually a comparison of procurement expenditure against overall organizational expenses over a specific period. With the increasing of spend under management, the capability of a firm to enhance cost and forecast expense increases.
All these are just some KPIs that you should follow to create an effective organizational structure. Keep up to date with these indicators and your team will be able to understand the purchasing and procurement habits of the firm, the performance of suppliers as expected. Along these lines, it gets simpler to cause changes in staff, to reallocate ventures, and, to put it plainly, survey the issues and locate the fitting arrangements.
If organizations want to excel they need to take KPI measurements and tracking into automated states. Choosing the right procurement software bundle helps the firm connect all of its concerned personnel and align them according to the requirements.
Automating the tracking process will reduce the chances of human error in data screening and collection.
Improving the procurement process requires to track it first, and if you aren’t tracking it with the right tools, you are never going to receive the expected outcomes.