Assessing the competencies of candidates for procurement departments, we always ask this question during interviews. The response is important to us because it demonstrates in what advanced procurement organizations our candidate has worked. Job titles often do not reflect the complexity of a procurement role. For example, in flat organizational structures, we have buyers who manage purchasing categories, reporting directly to the purchasing manager/leader/director, while in more elaborate organizations, buyers may be involved in the procure-to-pay process without any experience in strategic sourcing. Some may be accountable for cost avoidance, while others for order fulfillment.
Below, we present examples of KPIs (Key Performance Indicators) in procurement:
► COST
Cost Development: measures changes in costs over time and the effect of savings.
Savings: percentage of actual savings year over year.
Cost reduction = Actual Purchase Price - Last Paid Price.
Cost Avoidance: helps avoid unnecessary future costs and is often referred to as a "soft savings" KPI as opposed to a "hard savings" KPI like cost reduction. Examples of cost avoidance include signing long-term contracts to avoid future price fluctuations, investing in new technologies to lower compensation expenses.
Purchase Price Variance (PPV) = (Actual Price - Standard Price) x actual quantity purchased. PPV calculates how effectively the procurement organization achieves its savings goals. A positive PPV difference means the price paid for the item is higher than the budgeted range, thus positive PPV is considered unfavorable. Conversely, a negative PPV difference is favorable and desirable.
Implemented Cost Reduction: cost savings that have been realized or implemented within a specified period of time, concerning a specific product or service.
► EXPENDITURE
Spend Under Management (SUM): (Amount of Spend Managed by Purchasing Department / Total Company Expenditure) * 100. Managed spend, or SUM, refers to the portion of a company's expenditures that are supervised by the purchasing department.
Maverick or Rogue Spend: expenditures made outside defined purchasing policies.
Contribution to Total Spend: tracks the share of a particular procurement item in total expenditures.
► SUPPLIERS
Number of Suppliers and Supplier Spend: helps track spending with suppliers, aiming to limit 80% of expenditures through 20% of suppliers.
Compliance Rate: helps assess if a supplier complies with business requirements.
Quality Performance Rating: evaluates supplier performance in terms of price, delivery, quality, and service.
Supplier Defect Rate: measures the ratio of substandard products to the total number of inspected units.
Vendor Rejection Rate and Costs: helps evaluate internal quality management strategies.
Supplier Lead Time: the amount of time between order receipt and delivery by the supplier.
Price Competitiveness: best value considering price, quality, and additional services.
Supplier Geography: the percentage of suppliers located in low-cost countries or high-risk areas.
Procurement NPS (Net Promoter Score): identifies customer-centric companies by using the ratio of customers who would recommend it to those who would not. A provider with a high NPS KPI offers value, while one lagging behind serves as a warning signal.
Supply Chain Risk: percentage of single-source suppliers.
► CONTRACTS
Contract Prices and Compliance: helps maintain agreed-upon contract prices.
Contract Loyalty: expenditures made under contract compared to total expenditures.
Contract Coverage: expenditures covered by contracts compared to total purchases.
► PROCESS
Number of Procurement Processes Completed: completed within a year.
Time Spent per Procurement Process: and per process step.
Lead Time: Evaluation of the overall time required to fulfill an order. It measures the time between the initiation of the purchasing action and the receipt of the production model into the delivery system or the product/service. Fulfillment time should not be confused with purchasing order cycle time, as both refer to different time frames. Fulfillment time begins at the submission of the request and concludes after the final delivery and testing, whereas purchasing order cycle time starts from request initiation and ends at order confirmation. Fulfillment time is the sum of production lead time and administrative time.
Cost per Invoice: all costs associated with invoice preparation, processing, and archiving.
% of POs Approved Electronically: According to APQC (American Productivity & Quality Center), the top performers in this benchmark (at the 75th percentile) electronically approve approximately 98% of their purchase orders. Companies at the median (50th percentile) electronically process around 80% of their purchase orders.
Purchase Order Accuracy: precision in generating and closing orders.
► INTERNAL STAKEHOLDERS RELATIONS
Internal Stakeholders Satisfaction: measured through surveys or feedback.
Number of Complaints: regarding procurement processes.
Average Handle Time: for internal stakeholder requests.
► ESG (ENVIRONMENTAL, SOCIAL, GOVERNANCE)
Economic: Percentage of compliance with regulations and applicable laws, percentage of compliance with anti-bribery and anti-money laundering terms, percentage of key suppliers engaged in a joint sustainable development program.
Environmental: Percentage of compliance with industry environmental guidelines, percentage of key suppliers evaluated for environmental impact, percentage reduction in resource consumption such as energy and water, achieving carbon neutrality by 2030.
Social: Percentage of compliance with fair wage payment and elimination of child labor, percentage of compliance with the Modern Slavery Act, percentage of compliance with the United Nations Guiding Principles on Business and Human Rights (UNGPs), positive contribution to communities in operational areas.
► PROCUREMENT FUNCTION EFFECTIVENESS
Total Procurement ROI (Return on Investment): measures the cost reduction, including avoided expenses, achieved through procurement activities compared to the total operational costs of the procurement department. It shows the ratio of the amount spent to the revenue obtained. Benchmarking this KPI ensures that the organization is sufficiently competitive and financially strong to achieve its goals.
Emergency Purchase Ratio: helps track the number of emergency purchases. A high number of unplanned purchases does not reflect well on procurement strategy. The emergency purchase ratio sheds light on unplanned orders. Emergency purchases typically occur at higher purchase rates, so the lower the rate of emergency purchases, the better the business efficiency.
Emergency Purchase Ratio = number of emergency purchases / total number of purchases in a specified period.
Cost of the Purchase Order: Definition and application of the KPI cost of the purchase order may vary across organizations. The broad definition of the cost of the purchase order is the average cost of purchasing an order from the moment of purchase and creation until the invoice is closed.
Total Cost to Perform the Procurement Process Group: includes personnel, systems, overhead costs, outsourced functions, and other expenses.