In Procurement, like in any other domain, there are KPIs and in fact 100s of them. The tough part is to determine which are the essential ones so that you can invest your time and money on those few that will reap you the maximum benefit.
Now, KPIs also vary from industry to industry, so the ones that you’ll find below are industry agnostic. In this blog you’ll also learn about things that you have to be mindful of while implementing those KPIs and Benchmarking standards.
This article is a limited overview of the whitepaper explaining the topics in detail. So if you wish to grab all the necessary pointers, bookmark this article and visit shortly to download the complete whitepaper. The link will be provided at the bottom of this article. You may also request for the whitepaper in comments.
So what are the necessary KPIs that can help your Source-to-Pay (S2P) to reap maximum ROI?
Source to Pay (S2P) is an entire end-to-end process specific to the procurement function. It encompasses the entire realm spanning from spend management to strategic sourcing, vendor management to purchasing and performance management to accounts payable. The scope here is very vast and hence the KPIs we have included are broadly divided into 6 categories.
- Purchase operating expense dollars as a percent of supply chain purchase dollars
- Purchasing department employees as a percent of company employees
- Cost of Purchasing Order
- Cost Avoidance
- Supplier Quality Rating
- Annual Scrap Expense in $
- Supplier Lead Time
- Supplier Expediting Record
- Inventory Turnover Ratio (Stock turnover = Cost of sales divided by Average stock held)
- Inventory Activity = Average Monthly Inventory Relieved/Total on Hand Inventory
Employee Learning & Growth🔒
- No. of Certified Procurement Employees
- Training Investment per Employee vs Percentage of $ Spend
Now while working on implementing the KPIs discussed, a company has to be mindful of certain redundancies or cons.
THE BALANCING ACT 🔒
Be on time: Avoid situation wherein because of excessive focus on cost savings to procure cheap good/services, your business makes a loss because the supplier couldn’t deliver. Timely strategy plays an important role here.
KPIs to keep: If you notice a pattern of reporting high on not meeting KPIs, it is indicative of the KPIs not being chosen well. Ideally one should promise low and deliver high.
The rope-walk: Cost savings, Quality and Delivery are real good friends and they are interdependent. Treating any one of them with extra care over the other will disappoint the balance. For greater output of cost savings, uninterrupted supply and controlled stocks, strike a balance.
It is time now to discuss a little about benchmarking as mentioned earlier.
Source to Pay (S2P) benchmarking is the method by which a company bridges gap with a top-performing company from the same industry by help of the KPIs which we discussed in the beginning of this article.
PROCUREMENT BENCHMARKS 🔒
- POE < 1% TS
With world class organizations, Procurement Operating Expense or POE is usually below 1% of Total Spend (TS). And when studied from the lens of the below benchmark, it shows that the procurement function in world class organization is a profit generating department.
- CRS at 2% TS
Cost Reduction Savings or CRS averages at 2% TS across industries. CRS is realized by negotiating for a lesser price for the same goods purchased at a higher price earlier. This 2% savings on Total Spend indicates how world class organizations make a minimum net profit of 1% TS above the bottom line. Direct Profit = 2% CRS of Total Spend – 1% POE of Total Spend.
No business can thrive without measurements. In Source-to-Pay, it is critical that companies implement the right KPIs to measure improvement in a consistent manner. Companies should also be mindful of over-exploiting or under-utilization of KPIs as mentioned in the second section of this article. Benchmarking is tricky and hence should preferably be done in consultation with implementation experts in the procurement domain. Remember that you need set your benchmarks with organizations relevant to your industry, and also for ease of operation, you may consider the size of the company of its procurement function. Your ambition should be a studied one.
Areas marked 🔒 require further readin. Full content is accessible here.
- Source-to-pay vs Procure-to-pay: A Guide
- Ultimate Guide to Interpret Source-to-Pay Process Flows
- Linking Source-to-Contract & Procure-to-Pay
- 5 Key Benefits of Source-to-Pay Automation
- Source-to-Pay Digitization Diagnostic
- Webinar – Tech watch: Uncover the Potential of Intelligent Source-to-Pay.
- White Paper – Overcoming new Procure-to-Pay challenges in ANZ’s Government and Commercial Organizations