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• A procurement function without supplier performance KPIs is likely a fruitless process. While this procurement function may work in the short term, it cannot meet long-term procurement needs and changing supply chain demands.
• Measuring your suppliers’ performances help you evaluate your end-to-end procurement processes, providing total visibility into business processes. That’s why it’s advisable to measure your supplier’s performance at every stage.
Here Are Seven Key Supplier Performance KPIs You Should Be Looking For
1. Number of Supplier Performance Measures
Supplier performance KPIs evaluate the growth of the suppliers’ list and the company’s continued dependence on suppliers. The number of suppliers helps the procurement teams know which suppliers are available for specific products or services.
Relying on one supplier instead of having a portfolio of suppliers for specific products can be problematic. For instance, without an adequate number of reliable suppliers, your business will suffer last-minute supplier cancellations. In addition, over-reliance on one supplier makes it difficult to obtain products and services. This means that anytime the supplier suffers supply chain shocks, your business will experience similar frustrations.
It’s crucial to note that many suppliers may make you miss out on potential discounts and special payment arrangements. Businesses can know the suppliers they need the most and suppliers who need rehabilitation or replacement by tracking suppliers. So, enterprises must always check out supplier trends and growth and reconcile business needs and supply changes.
2. Defect Rates
Quality control is the cornerstone of any successful business relationship. The defect rate denotes the total number of defective products or supplies delivered to a client enterprise. The defect number provides an accurate representation of transparency and business credibility. This rate helps businesses evaluate the credibility and authenticity of suppliers, especially when defective products have been experienced before. The defect rate is measured by defects per million. Businesses determine defect rates by comparing total defects against the total amount of received products or suppliers.
3. Lead Times
The lead time is the period between the start and the end of a production process. Essentially, the lead time evaluates the total hours it takes to initiate and close a process. In supply chain management, the supplier lead time is the span of time between order submittal and the delivery of requested products. Usually, different suppliers have different lead times. So, evaluating the lead time allows you to know when products (or services) will be delivered. That, in turn, helps you schedule your mission-critical business operations and processes.
4. Compliance Metrics
All organizations are required to meet compliance demands and requirements. Therefore, it’s your responsibility to ensure you meet your business requirements and those of your suppliers. Compliance in supplier management helps businesses uncover potential supply issues and regulatory penalties emanating from violations. Compliance metrics may include situations where the price paid was more than the total amount due. Also, situations that evaluate defects against total supplies.
Supplier compliance reinforces the procurement-supplier relationship. Measuring the compliance rate helps you know how well a supplier meets their obligations and shows commitment laid upon requirements. The compliance rate evaluation also factors in various elements – lead time, delivery time, payment terms, and discounts.
5. Supplier Availability
The supplier availability metric evaluates a supplier’s availability during an emergency. Firms need to evaluate suppliers’ availability in case of unprecedented demands. Supplier availability provides predictability of production processes, helping businesses to achieve process continuity during supply shortages. Supplier availability enables enterprises to establish supplier reliability in case of demand. Organizations must meet a high level of suppliers available for streamlined procurement processes and efficiency.
6. Purchase Order PO Cycle Time
Organizations prepare purchase orders for products and services needed from suppliers. The PO cycle time evaluates the time the order is submitted to the procurement department and the time it takes to reach the supplier. The PO cycle time spans the entire ordering process, enabling businesses to track when products are ordered and when they’re received by suppliers.
7. Procurement Return on Investment
The procurement function is an ever-changing domain that requires adaptability. A procurement’s return on investment establishes the cost-efficiency of a procurement strategy. This metric establishes the total investment that goes into a particular procurement strategy. This ratio is determined by evaluating annual cost savings against annual procurement expenditures.
ProcurePort – Streamlining Procurement Processes
Meeting on-time deliveries is a win-win for procuring parties. It ensures supplier reliability and nurtures customer trust and loyalty. By evaluating on-time deliveries, businesses know when products are delivered within the agreed-upon dates.
A critical part of evaluating supply chain efficiency involves examining your supplier performance KPIs. Key performance indicators help you maintain a timeline of suppliers and know what they are doing and when. What’s important is that with changing procurement trends, enterprises are keen to evaluate whether suppliers meet evolving needs.
For instance, ethical sourcing is an emerging practice in procurement. Today, more than ever, suppliers are required to provide environmentally-friendly, safe, and quality products that conform to emerging ethical and moral standards. The accelerated adoption of green manufacturing and prohibition of child labor in sweatshops means that markets must pursue ethical suppliers. And supplier performance KPIs are the only way to get there.
Contact ProcurePort to streamline your procurement function.