5 PROVEN WAYS TO MEASURE PROCUREMENT PERFORMANCE
Learn to reduce costs beyond spend savings.
by Salim Khalife, Founder & CEO
Historically, cost savings was considered the only reliable measure of procurement performance. But spend savings can only go so far — at some point, it’s simply not possible to reduce costs further, so procurement professionals need to reaffirm their value to the organization in other ways. Here we look at five proven ways to measure procurement performance, along with a few tips for improving the metrics.
1. Procurement Cycle Time
We define the procurement cycle time as the time elapsed from placing creating a requisition to receiving the goods. Decreasing the cycle times associated with procuring materials and services is an effective way to cut procurement costs. Research from the American Productivity & Quality Center’s (APQC) found that top performers in procurement take fewer hours to place a purchase order and wait fewer days to receive materials from suppliers.
Automating the procurement process with suppliers can significantly reduce the time it takes to receive the ordered product. According to APQC’s research, e-commerce/e-procurement software can cut an organization’s cycle time from seven days to two. Not only does this mean you receive products needed for key projects sooner, but it can also help increase procure-to-pay efficiency.
Some ways to reduce procurement cycle time include:
- Minimize the time it takes to produce and approve a requisition
- Get approved purchase orders (PO) into the hands of vendors more quickly
- Proactively monitor open orders
- Provide vendor self-service portals empower vendors to enter their own invoices
2. Vendor performance
Vendor performance management refers to the monitoring and analyzing of the reliability, quality, and performance of your company’s vendors. Monitoring vendors can help your company boost efficiency and profits, reduce stock levels and inventory costs, and improve (both internal and external) customer satisfaction.
Some vendor performance metrics to monitor are:
- Delivery lead times
- Communication time lags
- Quality of the products supplied
- Pricing competitiveness
- The frequency of price changes
- Compliance with negotiated terms
- Substitutions made
- Number of back orders
3. Spend under management
Spend under management refers to the percentage of your organization’s total spend that the procurement department manages. It is a common metric of performance and can easily and uniformly be applied to organizations across all industries and sizes. For every dollar that placed under management, the average enterprise sees a benefit of between 6% and 12%.
Targeting areas of unmanaged spending is a key way procurement professionals can deliver value and maximize savings for their organizations. We highlighted five ways to reduce unmanaged spend here.
4. Cost savings
Cost savings remains a fundamental, pivotal metric to measure the success of the procurement function. In a recent analysis, The Hackett Group found that world-class procurement organizations spend 21% less (up to $6 million in cost savings for the typical large company) and have 29% fewer full-time-equivalents while generating more than double the purchased cost savings of typical procurement organizations.
Cost savings sounds simple enough, but how are companies successfully reducing costs? One direct way is to reduce the cost per purchase order, using techniques including:
5. Percentage of POs that are catalog-based
This metric doesn’t make everyone’s list, but when used as a proxy to measure compliance with negotiated contracts and pricing it provides valuable insight. When a majority of routine purchases are made through approved vendors through which you have pricing agreements, prices are typically lower, service is generally higher, and errors are less frequent. In addition, by using guided buying catalogs or PunchOut catalogs, organizations decentralize the requisition process, empowering individual users to initiate the process, freeing the procurement department to negotiate even better deals.
It’s only when you begin to measure the performance of your procurement activities that you can begin demonstrating the value the procurement department and its personnel bring to an organization. An easy way to start is by using our Procure-To-Pay Calculator, that will help you determine what procurement is costing you currently, and how you begin to save.
About the author:
Salim Khalife is the founder, president and CEO of Paramount WorkPlace, a technology company that develops, sells, and supports advanced web-based and mobile requisition, procurement, and expense software solutions for mid-market organizations. The company introduced its first cloud-based SaaS requisition application in 1997 and continues to innovate and expand its partnerships and integrations ever since. Learn more at www.paramountworkplace.com.