- Return on investment (ROI)
Comparing the ratio of cost savings and cost avoidance to the total cost of running the procurement function in an organisation is important, because it illustrates the financial contribution that procurement makes. Savings may be made through negotiation, supplier changes, bidding and smarter sourcing. It can also be used as a measure of efficiency. Having a high ROI indicates that procurement is generating strong value compared with its operating costs. As always, having accurate data is the key to measuring this effectively, so a clear baseline is required.
- Spend under management (SUM)
This one looks at the percentage of organisational spend that’s actively controlled by procurement. Having a higher SUM is important because it means maverick spend is less likely, which helps increase compliance levels. It also means that you have more negotiation leverage, as bigger contracts tend to provide you with more influence than smaller deals negotiated by departments. Indeed, best-in-class organisations often exceed a SUM of 80%, giving procurement a strong influence across the organisation.
- Purchase order / Procurement cycle time
This measures the time it takes for a purchase requisition to become a final approved PO issued to a supplier and is important as shorter cycle times improve operational responsiveness and stakeholder satisfaction. In contrast, long cycles create bottlenecks which can slow down production or service delivery, leading to poorer organisational performance.
- Supplier performance metrics
There are a range of factors you could consider here. These range from on-time delivery (OTD) and contract compliance, to average supplier lead times, on-time delivery rates and purchase price variances (PPV). These areas are important because they directly affect production continuity, customer satisfaction levels and reveal hidden costs that come about due to delays and rework.
- Supplier quality
You can save as much money as you like and avoid as many costs as possible, but if your suppliers aren’t providing the quality you require, or aren’t delivering on the contracts you agree, you won’t be helping your organisation to meet its strategic goals. Looking at measures such as defect rates, rejections rates and supplier parts per million (PPM) can all help you rate the quality of your suppliers.