Procurement Key performance indicator is to monitor procurement activities with the help of different parameters. Procurement includes raw materials, consumables, and other necessary items to run the organization. In a competitive environment very important to monitor procurement KPIs to achieve business excellence, systematically measuring and monitoring procurement activity is very important as well as structural cost reduction initiatives are very important to sustain in a market.
In this article, we learn each and every key performance indicator associated with Procurement. The category of procurement KPIs can be divided into four parts as per mention below.
1. Accuracy Level – Procurement KPIs (Key performance indicators)
The inaccuracy level includes two different KPIs, its measures the variation of actual parameters versus the required parameters of the procurement process. Focused on improving the accuracy level of attached Key performance indicators.
Compliance rate
The compliance rate is a percentage of fulfilling agreements between the organization and suppliers. In agreement includes many important criteria such as delivery time, product quality, discounts, and many more. Too many times organizations face issues with suppliers for not fulfilling on-time delivery due to certain reasons so in short its effect on supplier’s compliance rate.
Compliance rate = Disputed supplier’s order / total supplier’s order
Compliance rate = Disputed invoice / total invoice
Purchase order coverage
Purchase order coverage measure the number of invoices amount matches the number of purchase order amount. If we improve this KPI indicates the strong relationship with the different vendors and the accuracy of the procurement team.
Purchase order coverage = (Number of invoices amount match with the purchase order amount / total number of invoices generated) * 100
2. Operational Level – Procurement KPIs (Key performance indicators)
The operational level includes 6 KPIs and each one of them is related to the core procurement process. To achieve procurement excellence, measurement and improving operational processes are very important. Focused to improve below attached key performance indicators for better procurement performance.
A number of suppliers
This KPI indicates organization deals with a different vendor for required transactions. Some of the organization has very few suppliers and vice versa. The important thing is to maintain an optimum level of suppliers to minimize the risk of dependency. The number of supplier KPI measures on a yearly or quarterly basis.
Purchase order cycle time
PO cycle time includes PR creation, PR approval, PO creation, PO approval, receipt of invoice, and payment of the order. Generally, to consider each organization’s major time taking activity is the payment of PO because it’s dependent on the organizational process. PO cycle time is measured in days. Purchase order cycle time may vary from organization to organization.
PO cycle time (Days) = PO payment date – PR creation date
Purchase price variance
Price variation means the actual price paid to the supplier and the budgeted price. This KPI provides an overall idea for activity performing as per plan.
Purchase price variance = Budgeted price identified by procurement department – Actual price
Emergency procurement ratio
The emergency purchase ratio is basically the number of unplanned purchase orders generated over a certain period of time and compare with total purchase order generation.
Emergency procurement ratio = (Number of urgent purchase orders generated / number of total purchase orders generated) * 100s
Purchase in time
It means measuring and monitoring the percentage of the average procurement cycle on-time completion certain period of time. focused to improve the score nearest to 100% and it varies from supplier to supplier.
Purchase in time = (Number of order on time completion / total number of order completion) * 100
Negotiation Ratio
The negotiation ratio measures the how procurement price is negotiated through communication with the procurement person and supplier person. This KPI Possibilities to measure product-wise, supplier-wise, and overall ratio.
Negotiation Ratio (%) = ((first communication quotation price received by the supplier – final price after negotiation) / first communication quotation price received by supplier) * 100.
3. Supplier Level – Procurement KPIs (Key performance indicators)
This category of KPIs is focused on to measures the performance of suppliers. It is very important to review the performance of suppliers periodically to better understand relations with suppliers. Based on the supplier KPIs performance organization is to take decisions for future planning to deal with suppliers. In this category 4 indicators require to be reviewed as per below.
Supplier quality rating
This KPI measures the defective material provided by the customer compare with the standard material provided as per specification. Supplier quality rating compares supplier to supplier and this KPI helps a lot in selecting the best supplier certain period of time.
Supplier quality rating = (good products provided by the supplier / total products provided by customer) * 100
Supplier availability
supplier availability is measured by how a supplier responds to urgent scenarios and its material availability in urgent cases. This key performance indicator measures the strong vendor relationship with customers. Supplier availability is measured on a monthly, quarterly, and yearly basis as per requirement. Also, you can use this KPI measure with on-time supplier material availability.
Supplier Availability = (number of orders on time fulfilled / total number of orders) * 100
Vendor rejection cost
This KPI measures and monitors on a timely basis as per requirements. It includes direct and indirect factors such as defect return to vendor cost, material defective cost, rework cost, etc.
Supplier lead time
supplier lead time is a period of purchase order creation to material delivery to the customer. Measurement of this KPI varies from industry to industry. The majority of these KPIs measure the performance of suppliers.
Supplier lead time = day of material received – day of purchase order received.
4. Financial Level – Procurement KPIs (Key performance indicators)
At the financial level, there are 2 KPIs to be measured as per the attached below.
Cost of purchase order
The cost of the purchase order is basically the cost associated with the procurement cycle or processing of an order. It measures on a monthly, quarterly, and yearly basis.
Procurement cost
Procurement cost includes the cost comparison of each product supplier for a wise certain period of time. it provides overall detail about the increase or decreases in the cost of products or materials supplier-wise. Monitor this KPI on a quarterly or yearly basis for better analysis.
