Flying by the seat of one’s pants and hoping that all performance, operational, and customer service goals are met is no way to run a successful procurement organization in today’s competitive business environment.
“You can’t manage what you can’t measure—or what you’re not measuring,” says John Hutchinson, president and CEO at software solutions provider Vinimaya, Inc., in Cincinnati.
According to Hutchinson, the use of a straightforward measure known as a “KPI” or key performance indicator can mean the difference between a procurement department that wanders blindly—hoping that it’s acquiring the right merchandise and services from good vendors and at the best possible prices—and one that aims for excellence.
As part of an organization’s overall mission to set, track, and achieve goals, KPIs measure the most important activities and results associated with specific departments.
KPIs help companies elevate their standards, become better providers to their customers, and improve their own bottom lines,” says John Hutchinson, president and CEO at software solutions provider Vinimaya, Inc., in Cincinnati.“KPIs help companies elevate their standards, become better providers to their customers, and improve their own bottom lines,” says Hutchinson.
In most cases, KPIs go hand-in-hand with business intelligence (BI) to detect business trends and come up with viable courses of action.
Here are five KPIs that today’s buyers should be using:
- Total cost savings. With company budgets still feeling the strain of a slow economic recovery, total cost savings helps buyers keep costs in check while ensuring product quality and on-time delivery. By definition, total cost savings is the total amount of money saved by reducing the total cost of ownership year-over-year. “Total cost savings is a key reason that procurement departments even exist,” says Hutchinson, who advises buyers to factor both the savings on goods and services purchased and any savings on transaction costs (or, costs per order), when developing KPIs around total cost savings. Organization-wide purchases from contracted vendors, for example, can result in a 15% to 25% savings on both products and transaction costs over time.
- Quality of products and/or services. This critical KPI helps procurement teams gauge whether the goods and services they’re buying meet their company’s standards and those of their customers. Such KPIs should be centered on quality assurance, process control, and the methods employed to achieve those standards. Metrics like “defects per million,” for example, can be used to track supplier quality and, in turn, make improved sourcing decisions.
- On-time delivery. Customers today want and expect everything to be on their doorsteps yesterday. Working on the front lines with suppliers, procurement departments play a key role in making sure those expectations (unrealistic or not) are met and exceeded. By allowing buyers to take a big-picture view of delivery behaviors over a period of time, these KPIs can quickly detect whether a supplier is living up to expectations in the area of delivery—or not.
Customer service KPIs, such as inventory availability “go a long way in ensuring that the procurement organization is keeping the end user in focus when making decisions,” says Jim Harder, principal at Visual Data Group, Cleveland.Inventory availability. This KPI allows buyers to keep close tabs on whether inventory is in the right place, at the right time, and in the proper form. “Ignore this measure and you’ll constantly have to ‘rush’ freight in—an expensive proposition—to fill in the gaps,” points out Jim Harder, principal at Visual Data Group in Cleveland. The problem can be particularly onerous in the electronics field, where constantly changing SKUs are the norm and both overstock and outages are common. “This and other KPIs really fall under the customer service umbrella,” Harder adds, “and go a long way in ensuring that the procurement organization is keeping the end user in focus when making decisions.”
- Contract compliance. Depending on the length of the relationship, it can be fairly easy for suppliers to fall into a situation where they are “slacking” on contract terms and conditions. Oversight can come in the form of contract compliance KPIs that allow buyers to capture baseline information regarding service level agreements (SLAs), negotiated prices, and other important measures. Armed with this information, procurement specialists can assess current contracts, seek out new sourcing options, and better negotiate terms and conditions on future agreements.
If you’re not currently using KPIs, or if a system overhaul is in order, Hutchinson says the best strategy is to “start small and simple.” Come up with one or two KPIs that relate directly to data that’s currently available (on-time delivery, for example), and then develop a system of capturing, measuring, and using the data.
“In the beginning you may not even realize what’s being measured or why,” says Harder, “but the very act of measuring will help you focus on where the issues are and what needs to be addressed.”