Procurement 101Procurement KPI’s
What are the main Key Performance Indicators in the procurement process?
It is essential to define the qualitative and the quantitative factors that would be measured to determine whether or not the procurement process in an organization is on track and meeting its objectives. These factors are generally referred to as Key Performance Indicators [KPIs]. Successful managers make sure to regularly and systematically review them, in order to identify any issues or concerns as early as possible. In addition, KPIs play a vital role in encouraging high performers to do their best, as they understand that their hard work is not going to go unnoticed.
Organizations determine the KPIs they want to apply based on a number of factors, such as the industry and the procurement process they choose to follow, but here is a list of some commonly used KPIs to consider:
Measure the variation between the pre-set target cost for an item and the actual cost of purchasing it within a specific period of time. This can be applied on an item, items category, or all regularly purchased items as a whole. Determining the target cost can be as easy as taking the prices of the previous period and checking with the suppliers to find out if there are any plans for changes. But it’s not always that simple, managers sometimes have to study the market thoroughly and use their experience to come up with speculative numbers. The numbers then should be subjected to constant revisions and adjustments according to the market changing conditions. At the end, all the data should be gathered in one intuitive report – updated after each transaction, to help managers easily spot any deviation and take the needed actions to resolve them right away.
This is mainly concerning the suppliers’ role in the procurement process. Buyers, no matter how skilled they are, cannot do much to improve a thing in this part except making sure that they use reputable vendors. This is why it’s highly recommended to have a procedure in place to evaluate the supplier’s performance after every transaction and add the score to update their overall rating. There are so many factors that could be included in such an evaluation process, but one should not make this too lengthy or complicated. Tradogram is equipped with a fantastic tool for this sensitive task; it’s practical, easy, and very effective!
Monitor actual spend in comparison with the predetermined amount that could be spent on a certain category, project, department, branch, and the company as a whole. Sometimes, it is concerned with just variations related to exceeding the limits, but in other situations, the concern is also about being significantly under budget. Perhaps, there is no need to state the obvious by explaining why an organization should care to monitor their spending levels, however the real question is how to achieve the right balance. You do not want to press expenses down so much that could result in obstructing the flow of work and yield an unhealthy work environment, nor do you want to make it too loose and allow maverick spend. Therefore, it is crucial for savvy managers to be equipped with powerful tools that enhance transparency and visibility throughout the procurement process in order to achieve the right formula.
Accounts Payable Variations
Measuring variations between what’s been ordered and what’s been invoiced is key. Many organizations also add to that comparison; what’s been received/delivered. It’s been proven that failing to close the gap among these three activity centers could cause major problems like; double dipping (paying for something twice), lost orders (out-of-stock), double ordering (overstock), lost opportunities (extra fee, lost discounts for missing due dates), and most importantly is the loss of reputation. Therefore, smart managers always keep a close eye on this aspect to make sure that such variations would be resolved immediately, and as we all know having the right tools to do this can make a huge difference.
As you can see, KPIs are not just auxiliary tools. They play an imperative role in keeping the procurement process properly managed. It’s not like a new invention or anything. Successful organizations have always applied this principle as part of their system. What’s new, however, is that new technologies have made it possible for organizations of any size or type, to implement this valuable principle without having to dissipate their resources. If you have any questions or comments regarding this subject or if you would like us to show you how Tradogram can help you track all these essential KPIs, drop us a line: firstname.lastname@example.org
Want Tradogram news direct to your inbox? Sign up now.