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• Purchasing performance measurement is incredibly important for organizations. A cost reduction in procuring new goods and services can allow enterprises to position their end products and services competitively, thus impacting the bottom line.
• In recent years, procurement teams have played a strategic role in most organizations. A key driver of this shift has been the realization by organizations and business leaders that procurement can provide competitive positioning, especially when done well.
• Because of the changing outlook on procurement as an evolving and strategic function, organizations must be careful when evaluating purchasing performance.
Purchase Performance Measurement – Five Ways to Do It
1. Efficiency, effectiveness, functionality
Historically, cost reduction was the most obvious and common way to measure procurement performance. But spending analysis isn’t sufficient; it’s not possible to keep saving procurement costs. So, procurement teams need to reaffirm their value to the organization in other ways. That is why purchasing performance measurement goes beyond cost savings.
The first metric for measuring procurement performance is efficiency. The efficiency metric doesn’t look at what is being purchased by the procurement department. Rather, it measures how much this department achieves with the set budget. Efficiency is all about looking at how good departments are at spending and meeting their routine procurement needs.
Efficiencies in procurement methods will improve the overall effectiveness of the procurement process. For instance, the introduction of e-procurement systems, EDI, and vendor-managed inventory may improve receipt and pay processes. Similarly, adopting vendor management systems and supplier evaluation functions may provide better visibility into procurement performance.
A procurement department performing with an efficiency below their budgets must be recognized for its excellent work, while a department that blows its budget but fails to meet short-term business goals must be investigated.
2. Procurement cycle time
The procurement cycle is the time lag between creating a purchase requisition to receiving the requested goods. Procurement cycle time denotes the time it takes to order products to when they are officially delivered.
Transportation improvement improves the overall cycle time. When a procurement department negotiates with a carrier or several vendors to reduce transportation costs, the unit price per item is reduced significantly. The cost-saving from transportation improvements can measure the performance and effectiveness of procurement.
Decreasing the cycle time associated with procuring products and services is a classic way of saving procurement costs. Research by the American Productivity and Quality Center APQC found that top procurement performers save time when it comes to placing orders and fulfilling purchase requirements.
Thus, reducing the cycle time is associated with better performance because products can arrive at their intended destinations. Saving time in procurement helps teams focus on other high-value tasks, including processing, manufacturing, assembly, and distribution. So, it’s crucial to view cycle time as a critically underpinning element of procurement performance.
One of the fundamental pivotal benchmarks for purchasing performance measurement is cost savings. In a recent study, the Hackett Group found that top-notch organizations spend 21% less on procurement functions, which amounts to $6 million in cost savings for large organizations.
While cost-saving sounds simple enough, it’s crucial to ask how organizations achieve cost savings and impact their bottom line. You can reduce the cost per purchase using the following techniques:
- Incorporating vendor self-service
- Investing in process automation
- Investing in digital technology
- Using guided purchase catalogs
- Leverage punch-out tools
- Leverage digital capabilities including mobile acquisition and approval processes
Cost savings is the most obvious, no-brainer metric for evaluating procurement performance.
4. Vendor performance
Vendors perform differently on discrete metrics – reliability, efficiency, and overall ratings. Vendor performance management measures the reliability, efficiency, and effectiveness of suppliers.
Monitoring your vendor performance improves efficiency and productivity gains, reducing stock and inventory levels. In addition, it improves internal and external customer satisfaction.
The quality of products and services determines customer engagement levels. Quality products influence customer returns, leading to brand recognition and brand positioning.
When a product (or service) has improved quality either by changing the supplier or improving negotiations with an existing supplier, you will notice an improvement in waste reduction or in the optimization of production resources.
Key vendor purchasing performance measurements to consider include:
- Communication time lags
- Delivery lead times
- Quality of supplied goods
- Pricing competitiveness
- Number of backorders
- Frequency of price changes
- Substitutions made
- Compliance with negotiated terms
Looking at different metrics about your supplier will help you gauge their overall performance.
5. Spend under management
The term ‘spend under management is the total budget managed by the procurement department. This metric captures the direct costs, indirect costs, and service spending assigned to the procurement department. Spend under management is a reputable procurement metric because it can be uniformly applied to all organizations regardless of size and complexity.
Research shows that for every dollar managed by procurement teams, the organization benefits by 6% to 12%. Reviewing areas of unmanaged spending is a common approach that organizations can use to maximize their savings by leveraging and optimizing on spend under management.
ProcurePort – Bolstering Your Procurement Performance
Procurement return on investment refers to the overall returns monetarily that you obtain from procurement undertakings. And while procurement ROIs can be critical in measuring short-term efficiency improvements, it’s not the best metric for measuring procurement departments of different organizations, departments, and industries.
Several studies have been conducted on procurement performance. The results have shown that there’s no one-size-fits-all procurement model for all organizations. Rather, every organization uses a specific procurement method that satisfies its short-term and long-term procurement needs.
Regardless of the choice of the purchasing performance measurement method, some key measures are common in evaluating vendor performance. These measures include vendor quality, cost savings, price effectiveness, delivery metrics, and inventory flow.
You can contact ProcurePort to measure your procurement performance.