For supply chain managers, managing the supply chain as efficiently as possible is critical to the success of their operations. If you don’t, you risk dissatisfied customers, suppliers, and employees and losing your competitive edge. To keep everything running smoothly, monitoring your supply chain’s key performance indicators (KPIs) and acting immediately when something veers off course is imperative. Supply chain logistics are complex, even in the best of times. When problems come along, as in recent years, it only takes one area of poor performance to trigger a domino effect.
Staying in control and preventing potential disasters is achievable if you keep track of the right key performance indicators (KPIs) for your supply chain. A KPI is a value that measures how effectively a department or company is achieving its goals. KPIs are used at various levels throughout the organization. As a result, they often vary by business unit. The insights such metrics provide, help develop strategies to improve sales, eliminate inefficiencies and increase business volume. The best way to use KPIs effectively is always to remember that the “I” stands for indicator. It tells you if and where action is needed.
In my view, the 5 most important KPIs in purchasing are:
1) Cost Savings
Most procurement experts will agree that cost reduction is their most significant goal. In procurement, cost savings are the cumulative negotiated savings and discounts achieved based on an agreed baseline. They are achieved by aggregating spending across business units or regions. Thus, “hard savings” are the most fundamental KPI for procurement. They document the literal reduction in spending. There are two basic ways to achieve hard savings on current purchases: Negotiating a lower price with the current supplier or finding another supplier with a better offer. In addition, you can work toward “real savings” by applying best practices to reduce costs. Measurable metrics include cost trends, cost savings, purchase price variance, target cost analysis, product/commodity benchmarking, or commodity price fluctuations.
2) Cost Avoidance
This key figure helps procurement managers take measures to avoid additional costs in the future. Procurement cost avoidance is often referred to as a “soft savings KPI”. While this KPI does not make a direct impact on cost management strategy, it can still have a positive impact on cost savings. One way to leverage this KPI is to develop an internal cost avoidance strategy and combine it with procurement cost reduction metrics to avoid future external costs. For example, an effective cost avoidance strategy is to enter long-term contracts that protect the company from future price fluctuations.
3) Number of Suppliers
The supplier KPI provides information on the number of suppliers with whom the company works. Relying on a select few suppliers and not diversifying procurement risks dependency and last-minute cancellation by a supplier. On the other hand, having too many suppliers is also not advantageous as the opportunity for discounts is limited. In addition, contract suppliers can also be evaluated based on quality, discounts, and reliability. You can read more on the topic in these blog posts: Strategy and Supplier Evaluations. (Unfortunately, we have not translated them yet – maybe you are still able to get some information out of them.)
4) On-Time Delivery (OTD)
This KPI measures the efficiency of your supply chain. This determines whether the company is meeting on-time delivery goals. It is used to measure both customer satisfaction and supplier performance. If you deliver on time, it positively impacts your image and leads to customer satisfaction. All it takes is one order where on-time delivery doesn’t work for this to happen.
5) Accounts Payable
It would help if you did not think of accounts payable as only a department where invoices are processed quickly. It can be a “free” source of cash if you pay attention to KPIs there that can actually impact your strategic goals, such as DPO (Days Payables Outstanding), on-time payments, and cash discount utilization. These are metrics that can affect your liquidity and profitability and preserve cash.
The list of useful KPIs can go on and on: Purchase volume as a percentage of sales, purchase volume per employee, cost per order transaction, spend under management (managed costs), … The KPIs tracked by a company depend on its type and size and overall business strategy. You should choose baseline KPIs as a foundation that effectively assesses the procurement function’s performance. These need to be relevant and realistic and allow effective suppliers-, employees-, and business performance management.
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