Performance Metrics for Procurement Activities

Procurement Activities Performance Metrics

Performance Metrics for Procurement Activities

The efficiency of the procurement system of an organization depends on how well its management can analyse the performance data and act upon them. And so, different metrics are often used to track every procurement activity in order to better optimize the sourcing, timing, cost and overall quality of obtaining goods or services.

These measure the success and sustainability of procurement activities when it comes to the quality of the goods, the delivery system and the costs involved in the entire process.

Some of the most important performance metrics are:

1. Compliance Rate

Every purchase order begins with a legal contract that lists out the policies of the transaction.

Any deviation from the policy can lead to indirect costs or higher spending. To prevent that, the organization needs to maintain a certain compliance rate through well-defined terms within the contract.

2. Supplier Defect Rate

This measure indicates the percentage of products provided by a specific supplier that was deemed substandard.

A high supplier defect rate is definitely detrimental to the profitability of a company. Hence, the organization must reach out to trustworthy suppliers and define the terms of defective product delivery in order to lower this rate.

3. Emergency Purchases

Emergency purchases are made when an unexpected surge in demand leads to a shortage of inventory and thus, the need for immediate replenishment though an unplanned order.

A higher rate of emergency purchases reflect poor procurement planning and can lead to higher costs, supplier risks and delivery inconsistencies, which can do more harm than good.

4. Purchase Order Cycle

Purchase order cycle measures the time taken to process a purchase requisition and convert it into an approved purchase order.

It involves a complex process consisting of several steps including budget checking, vendor selection, negotiation and so on. A lower or optimized purchase order cycle can reduce the costs involved in each of these steps.

5. Vendor Availability

Vendor availability is extremely important for materialising emergency demands and unplanned orders. It indicates a vendor’s ability to respond and act quickly upon such sudden orders.

The higher this measure is, the more reliable the vendors are and, in turn, the more efficient the procurement system is. So, an organization must seek out vendors that provide swift order placement and delivery.

6. Cost Per Order

Cost per order, as the name suggests, denotes the total spending on processing each invoice.

This measure can be different from organization to organization since some companies prefer a manual approach while others are more or less automated. Companies with higher automation within their procurement activities have lower cost per orders.

7. Spend Under Management

This metric measures the percentage of management’s involvement in regulating the procurement spending.

The management of a company that is more engaged in controlling the direct and indirect costs involved in procurement is more efficient at optimizing these costs and forecasting any future expenses.

8. ROI from Procurement

The procurement return-on-investment (ROI) determines how effective the procurement system is at bringing profits within the most cost-efficient manner. This helps the organization explore investment strategies to save costs and improve the overall efficiency of procurement activities.

To conclude, procurement performance metrics are indispensable in understanding where an organization stands in comparison to industry standards.

And this article can help an organization understand how they can use credible data in order to visualize, track procurement activities and find room for improvement in order to optimize the processes better for all future endeavours.