7 KPIs your Procurement Team may be ignoring.
Procurement bridges the gap between product, internal stakeholders and customers.
In order to support the weight of internal and external expectations, procurement teams must be prepared to perform as a key value adder within an organization. Meeting expectations at the door isn’t always the easiest task, especially when those expectations can be wide sweeping (example: minimize cost).
A procurement strategy should be structured with a clearly defined set of goals and an overarching vision. Having clear goals in mind will allow your procurement team to backtrack, and think; ‘what do we need to do now, to reach our goals later.’ Success is a product of the work done in the present.
Managing the performance of your procurement activities is a good way to work towards goals in a methodical and strategic fashion.
**Disclaimer: I’m about to make all CEOs out there very happy with the following statement.
Reaching goals is best done when there is a clear indication, and management, of key performance parameters. This process is called Key Performance Indicator mapping, also known as developing KPIs. “KPIs should be SMART which means Specific, Measurable, Achievable, Relevant and Timely” (CIPS).
You may already be actively gauging KPIs within your procurement operations, but it’s important to continuously evaluate and reevaluate the essentials. Just because you’ve filled your wardrobe with the essential clothing items, doesn’t mean you’re not going to have to replace certain pieces when they get old, or update your fashion sense, or have accent pieces that are unique to your style.
Developing KPIs is crucial, and individual, to the infrastructure of your procurement team. KPIs can be the blueprint for success, and also the floor plan for pivoting. Remember, goals drive performance, and knowing how to gauge that performance is the only way to reach your goals. But, sometimes goals are unrealistic or misguiding. Gauging performance is equally as important to forging forward, as it is to thinking things over.
Whatever way you cut it, developing KPIs is all about identifying value drivers, and exploiting those areas for organizational gain. Procurement is a means to an end, and the end is enhanced top-line value.
For years, procurement KPIs have been pigeonholed to cost, time of delivery and spend. While these remain important elements of procurement performance, the growing complexity of global procurement forces us to revisit performance indicators. Fortunately, technology is beginning to play a role in the success of value-added through procurement. Be it qualitative or quantitative, structuring KPIs will allow you and your procurement team to gather business-critical data sets; individual to your organizational needs. This information will serve as the basis for more data driven decision-making.
Misguided performance isn’t helpful, it’s just resources spent. In the words of legendary basketball coach John Wooden, “Don’t mistake activity with achievement.”
Supplier Base Compliance
During sourcing projects, compliance is a valued attribute from the side of a supplier. The presence of compliance at the beginning of collaboration holds a lot of weight, because it is often a snapshot of the relationship to come.
For this reason, your organization should be gauging a supplier’s overall willingness to be governed. You should work to track a supplier’s ability to answer on any RFI, RFQ and/or RFP. This goes for assessments and on-site visits as well.
Word to the wise… standardization in your governance activities will return better results when gauging supplier base compliance as a KPI. For example, if you require an ISO 9001 and 14001 certification of all suppliers in a supplier self-assessment you can then begin to see quantified data sets from responses, to later understand how many of your suppliers are certified within the international standard. Again, this could require the convergence of KPIs and technology.
On a similar note, good collaboration is typically a byproduct of compliant supplier relationships. Begin to track the responsiveness and capacity of a supplier to respond to demands, especially when the demands are urgent. The availability of a supplier can be a key indication of how well your organizations will build a partnership.
Gathering an insight into the availability of a supplier will allow you to allocate resources intelligently; knowing which suppliers you can rely on, and which you can not. This information will serve as the basis for locating key strategic suppliers.
Sustainability & CSR Parameters
Procurement is a function that impacts social, environmental and economic infrastructures on a local and global level.
For this very reason, your procurement team needs to ensure that your procurement strategy and activities are aligned with global and local business efforts to practice sustainable development. Your procurement team shouldn’t be looking to follow the pack, when creating sustainable development. You should be looking to pave a new path, and that begins with addressing sustainability/CSR parameters in your procurement operations that have potential an impact upon people, planet and profitability.
One of the easiest ways to create KPIs for enhanced sustainability and CSR is to assess and evaluate suppliers upon various sustainability parameters. Assuming the position as the enforcer of sustainability and CSR KPIs, communicates to your suppliers that these are areas of importance. Impacting the sustainability performance at a micro/supplier level lays the groundwork for creating sustainability at scale.
Here are some of the sustainability areas you can begin to assess:
- Human Rights
- Worker Conditions
- Geopolitical Stability
- Child Labor
- Labor Rights
- Health and Safety
- Business Ethics
- Environmental Impact (CO2)
- Quality Management
Measuring the validity of the various parameters listed above can be done within initial assessments, and followed up by occasional auditing. A supplier scorecard, or rating can be developed with the help of technology, to visualize sustainability performance. Sustainability and CSR are important KPIs considering they can help locate risk-averse suppliers and/or defective supplier that could potentially have direct impact on brand and to-line value.
Now we’re picking up some steam here…
If you’re gauging suppliers on various performance areas, then you’ll begin to locate areas for wins. But with wins, come losses, and your KPIs will quickly indicate where improvements can be made within a supply base.
Such thorough governance and performance evaluation of your supplier base can, too, have pitfalls. “Don’t let the robustness of your monitoring lull your suppliers into complacency and remove their sense of responsibility for their own compliance and performance. It’s important to be clear about where accountability lies” (Plant 2016).
Gauging the ability to develop suppliers by measuring resources and time spent is a fairly good indicator of your ROI from a supplier relationship. Supplier development as a KPI is a means to find out; ‘Is this supplier costing me more than I’m gaining’. Sometimes the answer is yes, and sometimes it’s no, but without a proper compilation of data/KPIs… you’ll never know!
Supplier Base Consolidation
The real quantitative value you’re going to want to keep an eye on in your supplier base is number of suppliers. You want to continuously locate key suppliers, and try to consolidate your supplier base in areas that less strategic suppliers are present. But, finding a balance is important.
“Relying on too few suppliers and not diversifying your sources creates a high risk of dependency, and potential further problems if one of them pulls out at the last moment” (Schlosser 2018).
For this reason, you should gauge the performance of your supplier consolidation upon level of dependency, number of strategic suppliers, and percentage of defect suppliers.
As stated in the very first sentence of this post, procurement is the link between product, stakeholders and customers.
Customer Satisfaction is a procurement-KPI that requires internal collaboration between sales, marketing and procurement to gauge the overall satisfaction of a customer/customer base. Overall customer satisfaction has direct links back to the origins of the procurement operation. Sheer happiness or discontentment with a product can be gauged through surveying to quantify data sets regarding satisfaction.
When a degree of satisfaction is identified by your organization, that information should serve as a feedback-loop to directly influence future procurement decisions. Also, your organization can use the information to begin to identify category structures that are procuring with higher-scoring customer satisfaction, and those that are not. This can aid decisions regarding allocation of spend.
Procurement ROI is the return-on-investment that your organization is seeing from procurement operations. I believe this is a pretty straightforward KPI, and for that reason, I will provide a simplified description in the form of an equation from Procurement and Purchasing Center:
(Cost Reduction + Cost Avoidance)/Cost of Procurement Operation = Procurement ROI
Your Procurement ROI should be rather significant, especially if you’re responsible for a high volume of spend.
Identify your organization’s specific procurement KPIs (if you haven’t already), strategize to make them a key value driver in your procurement operations, and don’t ignore the elements provided above! Most importantly of all, be ready to put in some legwork if you want to finish the race.
As the old adage goes, ‘You can’t make an omelet without breaking a few eggs.’
Make sure your KPIs are SMART (Specific, Measurable, Achievable, Relevant and Timely) and give time to focus on the following:
- Supplier Base Compliance
- Supplier Collaboration
- Sustainability & CSR Parameters
- Supplier Development
- Supplier Base Consolidation
- Customer Satisfaction
- Procurement ROI
Until next week.