10 Ways to Assess and Measure Procurement Performance

What are procurement’s key deliverables in the current business environment? 

Monitoring costs? Yes. 

Maintaining strong relationships with suppliers? Yes. 

What about negotiating favorable pricing and contract terms? Yes again. 

But these aren’t the only goals. 

Every business today knows procurement can play a more strategic role amid growing uncertainty. From sourcing, supplier selection and contract management to ESG and sustainability commitments, procurement can make a huge impact on several fronts. But is there a way for businesses to check how procurement is performing? How can they quantify and measure this function’s performance? Let’s find out. 

What is Procurement Performance Measurement? 

Procurement performance measurement objectively measures the effectiveness, efficiency and spend of procurement. This helps to ensure that the products or services procured fulfil the requirements of the business. The performance is measured against several key parameters. 

The selection of key performance indicators (KPIs) for procurement can vary depending on the nature and size of the business, organizational structure, business strategy, and budget. 

Why is Measuring Procurement Performance Important? 

Imagine your procurement team says that it has improved compliance by reducing maverick spend. It has also negotiated favorable payment terms with key suppliers. But where is the proof of these claims? Unless there is specific data and evidence, these claims may prove to be false. 

Also, what cannot be measured cannot be improved. Businesses need to understand specific areas where procurement is lacking. For example, procurement may not be tracking when suppliers are delivering goods. Late delivery of raw material may in turn be hurting production timelines. Without measuring procurement performance on this parameter, businesses may not even be aware of the problem. 

By capturing data of relevant KPIs, procurement can communicate results in numeric terms. It can effectively allocate resources, identify specific areas of improvement and add more value to the business. 

Ways to Measure Procurement Performance

Here are ten parameters to measure procurement performance: 

1. Cost savings: 

Has procurement succeeded in negotiating favorable prices and contract terms? What are some of the other steps procurement has taken to bring down costs? Cost savings measure the reduction in price paid for goods/services compared to a baseline (e.g., previous price, budgeted price, or market index). 

2. Cost avoidance: 

This metric analyzes actions taken to prevent future price increases. For example, procurement negotiates to maintain a current price instead of accepting a supplier's proposed 5% increase. 

3. Spend under management: 

This is the percentage of total spend that is actively managed by procurement. Has procurement been able to bring more spend under management? A higher volume of managed spend indicates greater control and potential for savings. 

4. Maverick purchases: 

Has procurement been able to reduce the volume of off-contract purchases made by internal teams? Do internal teams buy from the contract? Or do they prefer to randomly buy goods from a supplier? Tracking this highlights a lack of control and non-compliance. 

5. Cycle time: 

The amount of time procurement takes to place a purchase order after a requisition is raised is a key indicator of procurement performance. The less the purchase order cycle time, the more efficient is the procurement function. Shorter cycle times indicate higher operational efficiency.

6. Supplier lead time: 

How long do suppliers take to deliver goods after the order is placed? Monitoring this duration helps improve inventory management and planning. What is the supplier’s on-time delivery rate, or the percentage of orders delivered by the promised date? 

7. Supplier quality performance: 

This can be measured by metrics such as defect rate (%), return rate (%), or the number of quality incidents from a supplier. 

8. Price competitiveness: 

Can procurement procure goods at competitive prices? Does it have a mechanism in place to counter potential disruption? How does it plan to deal with material shortages? 

9. First-time pass rate for invoices: 

What is the percentage of invoices that are correct and match the PO and can therefore be paid on first submission? A high percentage indicates good process alignment with accounts payable and accurate ordering. 

10. Percentage of spend with diverse suppliers: 

This has become increasingly vital in the current business environment. It tracks the progress made toward corporate social responsibility (CSR) and diversity goals. 

Procurement Needs to Add More Value to the Business 

Procurement’s role has evolved from a back-office function to a strategic business unit. It is no longer restricted to monitoring costs and ensuring that suppliers comply with all contractual terms and conditions. 

The popular opinion today is that procurement can deliver on multiple operational as well as strategic objectives. As businesses look to navigate ongoing uncertainty, they are increasingly looking to get more out of procurement. 

AI-powered technology can help procurement analyze huge amounts of data and decode it to derive actionable insights. With end-to-end visibility, procurement can anticipate supply risks and act proactively to mitigate their impact.