2. How does your procurement
organization measure up?
• To accurately determine how your
procurement organization is performing are
the key metrics used to measure and
benchmark supply management efficiency and
effectiveness.
3. Top 10 KPI’s used widely used by
successful procurement organizations.
• Total cost savings
• Quality
• Delivery
• Cost avoidance
• Implemented cost reduction savings
• Procurement Cycle Time
• Percentage of suppliers accounting for 80% of the spend
• Procurement ROI
• Managed spend as percentage of total spend
• Contract compliance
4. Total Cost
• The aggregate amount of money procurement
saves by reducing the total cost of ownership
(TCO) from one year to the next excluding
changes in volume. This measures the
purchasing departments contribution to the
financial success of the organization.
• These are actions that can be directly traced
back to the P&L (Hard savings)
5. Quality
• Supply base has demonstrated continuous
improvement in defect rates. This can be
achieved by identifying metrics such as
defects per million (DPM) that effectively
measure the progress being made towards
“betterment of quality”.
6. Delivery
• This KPI measures how well the procurement
department gets what the organization needs
when it needs it.
– Delivery to promise date
– Delivery to (original) schedule date
– Delivery to rescheduled dates
Measured as % of on time total shipments when
volume is large enough.
7. Cost Avoidance
• Cost avoidance is a cost reduction that results
from a spend that is lower than the spend that
would have otherwise been required if the
cost avoidance exercise had not been
undertaken.
– Examples: delaying a supplier’s price increase,
additional services such as training at no cost or
long term price protection provisions.
These ‘soft costs’ turn into hard costs over time.
8. Implemented cost reduction
savings
• As opposed to ‘identified’ or ‘pipeline’ cost
reductions, this KPI measures negotiated
savings that have actually been realized and
implemented by the organization.
– Resourcing a component or supplier after the part
has been qualified and put into production
– Backleveraging a supplier once the contract has
been changed
9. Procurement Cycle Time
• The average time it takes between requisition submission and
purchase order placement is one measure of procurement
cycle time.
• Another cycle time that can be measured is the time it takes
from the beginning of a sourcing process to the time that a
contract is signed.
10. Percent of active suppliers accounting for
80% of total spend
• This KPI measures the current state of supplier
consolidation and activity within supply base
from the previous year.
– New product introductions may impact this metric
– Changes in sales within the product portfolio may
have an effect as well
– This KPI drives efficiencies within the procurement
organization and drives down costs/PO
11. Procurement ROI
• This KPI measures the procurement
department’s cost effectiveness. This is
measured by comparing implemented cost
savings to the procurement department’s
operating budget.
12. Managed Spend as a percentage of Total Spend
• Managed spend is the amount of spend that
the purchasing department influences throuth
the strategic sourcing process. Total spend is
the amount of money organization spend on
products and services each year. This does not
include labor cost.
• Spend under management (SOM) is as high as
85% in companies with best in class strategic
sourcing organizations.
13. Contract Compliance
• This KPI measures compliance to contract
service level agreements (SLA’s), contract
terms and conditions, and pricing agreements.
This metric is used to benchmark suppliers
compliance to the standards they have
negotiated.
14. Summary
• Capturing baseline KPI information within the
supply base promotes ongoing supplier
compliance and identifies areas of
opportunity
• Actively measuring these top 10 KPI’s is the
key to continuous improvement across an
organization’s supply base.
• Benchmarking KPI’s against other best in class
procurement organizations creates
procurement goals and targets.
