6 KPIs to Showcase Your Procurement Prowess

Ever felt like your performance successes are more hidden than an unsolved mystery? You're not alone. Self-evaluation will help you not just survive but thrive, by providing objective evidence of performance that can guide your quarterly review and boost your visibility. Here are 6 KPIs that you can track – even if management isn’t.

1. Savings Achieved

Why It Matters: It’s the heart of procurement, saving money is king. Your ability to negotiate better deals and find cost-effective solutions directly impacts your company's bottom line. But the marketplace is fickle and not always fair, so pay close attention to standard cost maintenance. 

How to Measure: Track your Purchase Price Variance (PPV). Start by auditing your standard costs and make sure they are fair (I know, you don’t control it but that’s another subject). Then log the actual dollars saved through negotiations and strategic sourcing initiatives. 

Sometimes prices go up for good reasons, like your volume going down. Make sure this doesn’t negatively affect your net PPV by justifying updates to standard cost. 

Also note PPV is realized on receipt of the material, so if you save big on an annual agreement you might want to keep a side log.

Example: If you negotiate a deal that saves your company $500,000 annually, that's a clear win. Aim for a target, like saving 10x your salary yearly, as some top procurement professionals do.

2. Cost Avoidance

Why It Matters: While not as tangible as direct savings, cost avoidance plays a crucial role in preventing unnecessary expenses and maintaining budget integrity.

How to Measure: Document instances where your efforts prevented potential cost increases, such as avoiding price hikes, or negotiating removal of additional fees.

Examples

• Negotiating Stable Prices: Negotiating with a supplier to maintain current prices despite market trends suggesting a 5% increase can be logged as cost avoidance.
• Eliminating Fees: Successfully negotiating the removal of additional service fees or delivery charges that a supplier initially proposed.
• Avoid Premiums: Intervening early in the procurement process to prevent costly design changes or specification alterations that would increase overall costs.
• Prevent Penalties: Ensuring compliance with contract terms to avoid penalties or surcharges that could be imposed for late payments or order changes.

3. On-Time Delivery Performance

Why It Matters: To state the obvious, on-time delivery (OTD) is essential to maintaining production schedules and meeting customer demands. Delays lead to production stoppages, increased costs, negative visibility for you, and soul crushing shortage meetings. Start by establishing an OTD window like 5 days early/0 days late. Carefully maintain your purchase orders, if you agree to a change in the delivery date update your system.

How to Measure: Track the percentage of line items delivered on or before the promised date.  Set benchmarks and goals for improvement. Improving a supplier from 60% to 80% is a 30% improvement…present it that way!

Example: If 95% of your orders are delivered on time, you're meeting industry standards so if you’re doing better be sure to make it known!

4. Supplier Reliability

Why It Matters: Reliable suppliers are the backbone of smooth procurement operations and developing them should be your core competence. 

Their performance directly affects your company's ability to meet production and quality standards.

And their performance can be a direct reflection on you.

How to Measure: Evaluate suppliers based on metrics like OTD, quality as measured by acceptance rates, and responsiveness which can often be measured objectively by quote turnaround time or subjectively by periodically surveying team members who interact with the supplier. 

Once you have your metrics ironed out you can begin to implement scorecards to track performance over time.

Examples

• Consistent Quality Deliveries: A supplier consistently delivering high-quality components on time and with no rejects should be very visible internally. Document instances where the supplier has maintained a zero-defect rate over multiple shipments, highlighting their commitment to quality.
• Improving Poor Performance: Moving a poorly performing supplier to adequate performance is also a win. For example, if a supplier's on-time delivery rate improved from 60% to 85% after implementing your suggested changes, this significant improvement should be tracked and reported.
• Proactive Issue Resolution: Highlight suppliers that demonstrate proactive communication and quick resolution of issues. For instance, a supplier who identifies potential delays in advance and takes corrective action to ensure timely delivery showcases reliability.
• Flexibility in Demand Changes: Recognize suppliers who can adapt to sudden changes in demand without compromising delivery schedules or quality. If a supplier successfully handles a 20% increase in order volume with no delays or defects, it indicates their robustness and reliability.
• Excellent Responsiveness: Suppliers who respond promptly to inquiries, quote requests, and issue resolutions can significantly enhance procurement efficiency. Document examples where a supplier provided a quote within 24 hours or resolved a critical supply issue within a day.
• High Acceptance Rates: Track suppliers with high acceptance rates, indicating minimal returns or rejections due to quality issues. For example, a supplier with a 98% acceptance rate over the past year demonstrates consistent reliability.
• Supplier Development Programs: Document cases where you've collaborated with suppliers to implement development programs that improve their performance. For instance, working with a supplier to enhance their production processes, resulting in a 10% reduction in lead times.

5. Inventory Turnover

Why It Matters: Efficient inventory management minimizes holding costs and reduces the risk of obsolescence. High turnover rates indicate effective stock control. It is a key metric for inventory control.

Inventory management is often out of scope for procurement, but you can still win points (and maybe a promotion) for demonstrating savvy on this metric.

How to Measure: Calculate the ratio of cost of goods sold to average inventory during a specific period. Higher ratios signify better inventory management. 

Details can get involved, use ChatGPT for suggestions that consider your unique environment. Turns of 11 or 12 are outstanding, below 6 is poor.

An inventory turnover ratio of 8 means you sell and replace your inventory eight times a year, indicating robust inventory practices.

Ways to Improve Inventory Turns

• Optimize Order Quantities: Use Economic Order Quantity (EOQ) models to find the ideal order size that minimizes both ordering and holding costs. This can help in reducing excess inventory and improving turnover.
• Implement Just-In-Time (JIT) Inventory: Shift to a JIT inventory system where materials and products are ordered and received only as they are needed for production or sales, thus reducing the amount of inventory held.
• Enhance Demand Forecasting: If you are a buyer/planner, optimize your forecasting tools and techniques to better predict customer demand, leading to more accurate ordering and reduced inventory levels.
• Regular Inventory Audits: Conduct regular audits to identify excess or obsolete inventory (E&O). Implementing strategies to sell off or write off E&O can be key to improving inventory turnover rates.
• Improve Supplier Lead Times: Work with suppliers to reduce purchasing lead times, which can allow for smaller, more frequent orders. This reduces the amount of inventory you need to hold at any given time.
• Implement Vendor Managed Inventory (VMI): Collaborate with suppliers to implement VMI programs where the supplier manages your inventory levels based on agreed-upon targets, ensuring you always have the right amount of stock. 

Try to arrange for the supplier to own the VMI stock and bill you based on consumption. 

Because you are now holding zero inventory, it can have a huge impact on inventory turns. 

• Utilize Consignment Inventory: Use consignment inventory arrangements where suppliers retain ownership of inventory until it is used or sold. This can reduce your inventory carrying costs and zero inventory means huge impact on inventory turns. 

6. Supplier Diversity Spend

Why It Matters: Promoting supplier diversity not only supports social responsibility but can also lead to innovative solutions and competitive pricing. If your company values diversity it will appreciate your leadership and example.

How to Measure: Track the percentage of total spend allocated to diverse suppliers, such as small businesses, minority-owned, and women-owned enterprises. Use the Small Business Administration guidelines to classify suppliers. 

If 15% of your procurement budget is spent with diverse suppliers, you're contributing to a more inclusive supply chain while potentially uncovering new opportunities.

Examples:

Small Business (SB)

• Description: A business that is independently owned and operated, not dominant in its field of operation, and qualifies as a small business under the criteria and size standards established by the SBA.
• Criteria: The size standards vary by industry and are generally based on the number of employees or annual receipts.

Small Disadvantaged Business (SDB)

• Description: A small business that is at least 51% owned and controlled by one or more socially and economically disadvantaged individuals.
• Criteria: Social disadvantage includes being part of a minority group such as Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, or Subcontinent Asian Americans. Economic disadvantage involves demonstrating economic disadvantage such as limited financial resources or lack of access to capital.

Women-Owned Small Business (WOSB)

• Description: A small business that is at least 51% owned and controlled by one or more women, and primarily managed by one or more women.
• Criteria: The women must be U.S. citizens, and the business must meet small business size standards.

Economically Disadvantaged Women-Owned Small Business (EDWOSB)

• Description: A subset of the WOSB program, where the business is owned and controlled by one or more women who are economically disadvantaged.
• Criteria: The women must demonstrate economic disadvantage through personal financial condition and meet certain income and asset thresholds.

Veteran-Owned Small Business (VOSB)

• Description: A small business that is at least 51% owned and controlled by one or more veterans, and the management and daily business operations are controlled by one or more veterans.
• Criteria: Veterans must have served in the U.S. military and been discharged under conditions other than dishonorable.

Service-Disabled Veteran-Owned Small Business (SDVOSB)

• Description: A small business that is at least 51% owned and controlled by one or more service-disabled veterans, and the management and daily business operations are controlled by one or more service-disabled veterans.
• Criteria: Service-disabled veterans must have a disability rating from the U.S. Department of Veterans Affairs or the Department of Defense.

HUBZone Small Business

• Description: A small business located in a Historically Underutilized Business Zone (HUBZone), and at least 35% of its employees must reside in a HUBZone.
• Criteria: The business must be owned and controlled by U.S. citizens, a Community Development Corporation, an agricultural cooperative, or an Indian tribe. The principal office must be located in a HUBZone.

Practical Tips for Tracking KPIs

• Set Clear Goals: Define specific, measurable targets for each KPI to guide your efforts and evaluate success. Getting management buy-in is a plus, but don’t hold back if they don’t engage.
• Use Technology: Learn to leverage your ERP software to automate data collection and analysis, ensuring accuracy and efficiency while reducing time. 

If your ERP does not have strong reporting features make friends with IT and learn to access the SQL tables. 

Use ChatGPT to guide you, don’t even think about trying to learn SQL!

• Regular Reviews: Conduct periodic reviews of your KPIs to identify trends, address issues, and adjust strategies as needed. 

Remember, performance improves with the frequency of measurement. 

For each metric, if you are killing it measure once a quarter, performing adequately measure once a month, poor performance measure once a week, bad performance measure once a day, and if your CEO starts calling measure every hour!

• Collaborate: Work closely with finance, operations, and other departments to ensure alignment and support in achieving your procurement goals.

By focusing on these key performance indicators you can enhance your strategic value, drive cost savings, and support your company's overall objectives. 

Even if it takes your management a while to notice,  the self-esteem lift alone is worth it.

Additional Resources:

• Small Business Administration
• Certified In Planning & Inventory Management (CPIM)