5 Important Procurement Metrics You Should Be Tracking
The Coronavirus pandemic presented unique challenges for multiple industries, including procurement professionals. Supply chains across the world experienced unprecedented interruptions as businesses around the globe sent employees home and dealt with COVID-19 symptoms. Traditional in-person B2B sales changed suddenly, and the rapid transition to remote work made paper and email-based workflows unreliable.
But procurement departments around the U.S. stepped up to meet the challenge, as did the digital procurement platforms that became indispensable during the pandemic. B2B buyers who had invested in eProcurement integration and automation were better able to adapt to a changing sales landscape; one of the reasons eProcurement-based buying increased by over 15% in 2021, making eProcurement the fastest-growing digital sales channel.
During these kinds of transitional periods, it’s more important than ever to monitor and respond to procurement metrics. When everything around us is modernizing and changing, data is an anchor and a guide for your business.
Although the global supply chain is recovering from the effects of the pandemic, now’s the time to take a step back and ask yourself some questions about your business:
- Are your new systems working?
- Are costs under control?
- Are data entry and communication errors disrupting supplier relationships?
Identifying and using procurement metrics can help you more easily answer these questions and help you better identify successes and challenges.
What Are Procurement Metrics and Procurement KPIs?
Metrics are measurements that aggregate data to help us understand what’s going on with business systems. By itself, data is messy and confusing, and analyzing the results into relevant metrics can help highlight meaningful information. A table of everything your company purchased and what it paid over the last year is an example of procurement data. Although this data is critical to business success, up-leveling it into metrics that are more helpful, such as monthly average spend or average order values, can help you and other key stakeholders understand the whole picture.
Data can be gathered and summarized in a thousand different ways, but not all of them are equally useful. While it might be an interesting anecdote to know the average number of paper towels your company orders on Tuesdays, that statistic won’t help achieve procurement goals. Some metrics are more important than others and can differ from business to business, but the most important metrics for your business to identify are procurement KPIs—key performance indicators.
With all the numbers and statistics flowing through your procurement process, procurement KPIs are the numbers that must be accurately measured and documented. When there’s a problem with processes, procurement KPIs track the health of your procurement strategy and the effectiveness of your systems.
5 Procurement Metrics You Can’t Afford to Ignore
The metrics that matter to your business depend on what it’s trying to achieve. Each company is unique, and KPIs change over time. But there are KPIs every procurement professional should monitor, particularly as procurement strategies evolve and modernized systems are adopted.
1. Contract Compliance Rates
Compliance rates cover a variety of more specific metrics, but they answer the question: are suppliers complying with your business’s procurement policies and agreements?
- Are they delivering products within the contractually specified period?
- What proportion of invoices match agreed-on prices and discounts?
- How many invoices are disputed, and what’s the difference between quoted prices and the price your business pays?
- What proportion of delivered goods are defective or substandard?
Poor contract compliance rates indicate issues with supplier relationships. They may reveal opportunities to reduce costs by renegotiating, improving processes, or moving to a supplier better aligned with your company’s goals.
2. Cost Per Invoice
Cost per invoice focuses on how much procurement costs the business for each finalized invoice. It includes the cost associated with ordering, processing, and paying, such as labor, overhead, and software systems. Procurement operating expenses should be less than 1% of total spend, and CPI is a helpful way to track whether cost-saving initiatives bear fruit.
For example, a business transitions from manual order processing to integrated eProcurement with PunchOut catalogs, purchase order automation, and electronic invoicing. Automation eliminates expensive manual processing, so CPI should be lower. The cost reduction should continue as more supplier relationships are brought under the management of automated systems.
3. Spend Under Management
Spend under management is the proportion of spending managed by procurement. In organizations that use eProcurement software, it can be more narrowly defined as spending conducted via the eProcurement system in line with procurement policies. It excludes rogue spending and other unmanaged spending. Unmanaged spending rarely takes advantage of negotiated discounts and other favorable contractual agreements. As such, it inflates procurement costs.
4. PO/Invoice Accuracy
Inaccurate procurement documents—including purchase orders and invoices—inflate operating costs and damage supplier relationships. At best, they cause delays and increase processing costs. At worst, they damage relationships to the point of legal action.
Human error causes the most PO/invoice inaccuracy, particularly manual processing and data entry. Organizations that adopt automated PO delivery and eInvoicing experience substantially improved accuracy and reduced costs.
5. Procurement Cycle Time
Procurement cycle time measures how long the procurement process takes, from ordering to delivery and payment. It’s a helpful indicator of process efficiency, and it has consequences for the health of the business. Shorter cycle times result in greater agility, lower stock levels, and early payment discounts. Procurement cycle time is another example of a procurement KPI that can be beneficially affected by automation—manual processes often introduce unnecessary delays.
These five procurement KPIs can give you and other stakeholders a temperature feel for how efficiently your eProcurement systems are working, but gathering the data for metrics and KPIs can be challenging and costly when procurement data and documents are hidden in fragmented systems.
Data transparency is one of the most significant benefits of eProcurement systems that integrate with supplier eCommerce stores. To learn more about how eProcurement integration and automation can help your business streamline procurement processes and gain insight into the metrics you care about the most, complete the form below and an integration specialist can help answer your questions.