You’ve recently made the decision to invest in procurement to try to optimize your organization’s purchasing.
That’s great news.
But how exactly can you tell whether your investments are worthwhile?
Keep tabs on these seven key performance indicators (KPIs) to measure how effective your procurement optimization efforts have been to date:
1. Year-over-year Savings
One of the main goals of a proactively managed procurement process is cost savings seen through the elimination of inefficient processes and less-than-ideal agreements with suppliers. To get a good idea of how well—or how poorly—your procurement investments are paying off, you need to track year-over-year savings. It will give you a bird’s-eye view of your procurement department. Of course, you’ll then have to drill down into the data even further to see exactly where you’re reducing your costs. That way, you can also find out which areas need additional refinement.
2. Maverick Spending
Maverick or rogue spending is a major problem at most organizations. According toone report, 54 percent of employees admit that they’ve made purchasing decisions without going through the proper authorization channels. In order for your organization to be as profitable as it can be, you need to curtail all superfluous spending. One study found that the average large organization stands to save millions of dollars by reducing rogue spending by 5–10 percent. The more progress you make on reining in maverick spending, the healthier your bottom line will be.
3. Supplier Management
How many suppliers does your company work with? Best practices indicate that the fewer suppliers you work with, the better the chances you’ll be getting great deals. By keeping tabs on the number of suppliers you work with and figuring out how you can consolidate orders to get lower prices, you can save significantly while streamlining the procurement process. This key performance indicator is particularly important for organizations that have recently undergone mergers or have acquired other companies.
4. Cost Reduction
Which specific procurements accounts have you been able to lower the most? Keeping track of cost reductions, either by project or over a period of time, enables you to see where your efforts are working most effectively and which other areas need more attention. Track vendor spend and build projections for projects of a certain size or time period. Then, dive deeper into overall cost reduction strategies for those projects. Over time, you'll gain key insights on how to replicate and improve reductions in the future.
5. Cost Avoidance
In order to understand the actual ROI of your procurement investments, you need to consider how much money you’re saving overall. But you also have to determine how many excess expenses you’re avoiding by optimizing purchasing. For example, if investing in a new e-procurement system enables your employees to work 20 percent faster, your organization can stretch salary expenses considerably.
6. Contract pricing/Compliance
Negotiating extremely favorable terms won’t get you too far if you’re not taking advantage of every discount available to you. Similarly, if a supplier isn’t holding up its end of the bargain, you may be able to talk your way into lower prices. To optimize spend management, you need to pay attention to whether your purchasing managers are always taking advantage of favorable payment terms. You also need to ensure contracts are enforced.
7. Contribution to Total Spend
Some departments or business functions will invariably take up more funds than others. It’s important to study which facets of your organization are using the most resources. That way, you’re able to understand where you need to focus the majority of your energies to improve procurement efficiency.
In an ideal world, you’d be able to throw money at improving your organization’s procurement strategy and it would translate seamlessly into cost savings.
But it’s not that simple.
Every organization has different needs. By keeping track of these seven spend management KPIs, you increase the chances that your procurement investments return the rewards you’re looking for. With more data at hand, you can further refine your purchasing strategy to return even larger dividends.