what metrics to improve in order to procure all deals
This article was updated in December 2021 to reflect irresolute conditions, prices and trends.
If y'all can't mensurate it, you can't improve information technology, as the maxim goes. Which is why those in the procurement space keep a sharp eye on the best procurement metrics for measuring their performance. Here we've pulled out our tiptop 10 metrics that matter in 2022. But before we go into those details, allow's have a quick recap:
What is procurement?
In simple terms business procurement is the process of locating and acquiring goods and services from external sources for the business to use. Procurement activities include planning, sourcing, and negotiation, along with risk management, legal and value analysis. This is often managed with the help of supplier management software or inventory direction software.
While many businesses are interested in procuring the best quality goods and services at the cheapest price, cost is not the just procurement factor. Contemporary concern procurement has evolved and is now largely value-driven. The aim of buy management today endeavours to create business value past establishing multi-dimensional and collaborative relationships with business suppliers.
One challenge of modern purchase management is that many organisations lack a formal visitor-broad strategy to accomplish value through their procurement activities. This makes it hard to decide if procurement is contributing to company objectives and if and then, how that contribution is measured.
A robust procurement strategy should explain how an organisation seeks to optimise the businesses external spend, procurement costs and other value contributions such as product innovation, spend reduction and process efficiency.
Purchase management improves profitability by helping to reduce raw fabric costs, streamline processes, and place better sources of supply. Therefore, information technology's important for businesses to develop and implement a procurement strategy that is aligned with the overarching corporate strategy and its objectives.
Procurement in 2022 and across
In the 12 months afterward the Covid-19 pandemic began, businesses were in crisis style and procurement managers were no exception. The pandemic's global scale exposed largely unprecedented, supply chain vulnerabilities.
However, crisis direction has started to transition into recovery, with some signs of growth returning. Five mutual themes emerging for procurement in 2022 are:
- A focus on adventure direction and social value growth, although cost optimisation volition remain a priority
- People at the forefront; ensuring the wellbeing and support is at that place for employees to adapt to new working styles and capabilities to succeed in 2022
- Accelerating value capture by leveraging digitisation, supplier direction software, and spend analytics
- Recalibrating cost-saving targets through zero-based category and value-creation strategies
- Creating new opportunities by investing in supplier partnerships and joint innovations
Of course, the emphasis on each priority will differ depending on the manufacture. For instance, industries similar transportation and logistics, engineering science or consumer goods will focus more on supplier collaboration. Those in the financial services and agronomical industries are set to transform functions through accelerating digital technologies and spend-analytics to deliver new opportunities. Traditional heavy industries, such as oil, gas, chemicals, and advanced materials will navigate major cost challenges resulting from a significantly reduced demand.
To be successful in any aspect of a concern it'south important to exist proactive about planning, and that is undoubtedly truthful when it comes to procurement strategies for both the short and long term. While information technology's difficult to account for every possible scenario, the Covid-19 pandemic has provided an opportunity for businesses to rethink their procurement strategies after globally connected supply chains were repeatedly disrupted. That's where Procurement Metrics and Cardinal Operation Indicators (KPIs) come into play.
Procurement metrics & KPIs
Procurement metrics and KPIs allow organisations to measure results and guide best practice performance. Metrics and KPIs should be viewed from the broader process level and include such areas every bit strategic sourcing, supplier management and compliance, logistics and contract management.
Here are our elevation ten peak procurement metrics and why they thing.
1. Undamaged shipment rate
The undamaged supplier shipment rate measures the consistency with which suppliers deliver undamaged goods to your business.
The metric is measured by taking the total number of undamaged orders received from suppliers and dividing it past the total number of orders received by that supplier over a set timeframe and multiplying it by 100 to arrive at a pct:
(Full amount of undamaged orders received / Total of all orders received) x 100
The undamaged supplier shipment metric can exist used as a KPI to determine if the cycle time for the deliveries to customers is increased when the damaged shipment rate is high. Alternately, the metric may point that the business has failed to create standard obligations for supplier shipments such equally setting packaging standards for shipments as part of the supplier contract.
2. On-time delivery: all suppliers
The on-time delivery metric measures the time from when the gild is shipped by the supplier to when it is receipted by the business. The on-fourth dimension aircraft rate focusses on improving services and is a central indicator of customer satisfaction.
The metric measures the pct of suppliers that evangelize some belatedly shipments and those with none. The college the on-time shipping rate, the more efficient the supply concatenation. The calculation for this metric is:
(Quantity of on-time shipments / Full shipments) 10 100
This KPI aids in setting benchmark aircraft times relative to each supplier and allows organisations to optimise forward shipping and delivery processes for their customers – which reduces turnover time and improves client satisfaction levels.
3. On-time delivery: single supplier
The on-fourth dimension delivery rate shows the per centum of items or order value that make it on or before a requested ship date. Comparative to on-time delivery on all deliveries, the single supplier metric drills downward an extra level to determine the delivery reliability of private suppliers. The calculation for this metric is:
(On-time orders / all orders by a single supplier) x 100
A high percent of on-time delivery is indicative of an efficient supply chain. This functioning measure out is central to customer satisfaction considering a depression rate can negatively touch on guild fulfilment – and coming together sales order demand is crucial for client retention.
4. Warehouse space utilisation
Keeping warehouse costs low begins with accurate data on your warehouse facilities processes and operations. Warehouse space utilisation is a measure of how efficiently your warehouse costs are existence managed.
Warehouse infinite utilisation is determined by adding up the volume of all items that are stored in the warehouse and dividing this by the full warehouse storage space:
(Square meterage used / total square meterage) 10 100
Costs can vary from warehouse to warehouse, only information technology's of import to measure and regularly review this metric to identify opportunities for toll reduction. You can then reconfigure the warehouse if needed to have reward of every inch of available infinite and maximise storage capacity by making use of any vertical space.
Read more: Warehouse Optimisation: Improving Workflow Efficiency in Your Warehouse
v. Raw materials cost as a percentage of COGS
This measure calculates raw material costs equally a percentage of the price of appurtenances sold (COGS) divided by the total COGS over the same period, as a percentage. Practice non include indirect raw materials or other indirect expenses when calculating this metric.
This mensurate tin can exist applied to make up one's mind the efficiency of procurement processes and where improvements tin can be made. The calculation for this is:
(Straight raw materials expense including direct labour / total COGS) x 100
Loftier raw fabric costs could bespeak you are simply paying too much for your raw materials. Notwithstanding, it may besides be low-quality materials that create rework or loftier scrap rates. Conversely, loftier raw textile costs can signal an over-purchasing of raw materials due to inaccurate demand forecasting.
In that location are many ways to reduce your raw material costs, such every bit employing continuous improvement techniques, negotiating discounts with suppliers, or implementing supplier management software to place opportunities for price reduction. The single best fashion to optimise demand forecasting and avoid excess raw materials inventory is past using inventory management software.
6. Spend under management
Spend under management is an overall measure of how much spend a given company moves through its procurement department. It refers to the practice of comprehensively managing every supplier relationship and each dollar that is spent on visitor purchases. All-time practice spend management integrates and automates all procurement activities from source to settlement.
Spend under management gives the system the visibility to have greater control over spend and helps procurement reduce potential risks. This systematic view ensures that buying happens as planned and supplier payment complies with contracts.
The benefits of best practice spend management include greater efficiency through automation and digitisation and more than effective collaboration betwixt supply partners. It also helps to reduce supply costs and risks because you know exactly what is being bought, where it'southward been bought from, and at what price – and this ensures greater competencies through informed decision-making.
Spend management tin be aided by technology such as online inventory direction and supplier management software that improves spend assay and sourcing activities.
These tools will digitise sourcing, contracting, and procurement processes, as well as manage suppliers, invoicing, and payments processes. Consolidating these tasks into one simple deject-based platform that integrates with the digital business network enables the business to collect and analyse all spend data for a meticulous insight into company spend across the complete organization.
seven. Proportion of competitive spend
Calculate your proportion of competitive spend by taking your advertizing spend for a budgeted flow and dividing it past the total of all market advertising spend for the same product or category:
(Advertising spend / entire market place spend in same product or category) x 100
You can use a asking for proposal (RFP) to decide the proportion of competitive spend. RFP documents are an essential role of the procurement procedure for companies interested in the procurement of a production or service. An RFP certificate lists the scope and all requirements of a competitive spend campaign, and is used to announce the new project opportunity through a bidding process.
In simple terms, an RFP tin be compared to a design or creative brief presented to marketing agencies to source creative content, graphic blueprint or branding & promotional materials.
Agreement competitive spend and the RFP process is important to decide goals and how to measure the project'southward success. This metric also guides KPIs for the purpose of measuring return on investment.
viii. Proportion of digitally enabled suppliers
Technology is reinventing supply chains, and knowing the proportion of your suppliers that are digitally enabled is a useful measure out to rail. The Covid-19 pandemic highlighted how digital supply bondage are crucial to maintaining business continuity and efficiency. The adding for this is:
(Digitally enabled suppliers / full of all suppliers) x 100
Integrated software systems and supplier management software enables seamless information sharing, removes bottlenecks, and provides a holistic view of the supply chain. Therefore information technology'south of import to digitise your supply chain considering technology drives integration in and between organisations, enhancing visibility beyond supply chains from end to end.
nine. Corporate social responsibility
Corporate purpose and social bear upon bulldoze business value because consumers are largely attracted to brands that share their values – such as fairness, integrity, and social responsibleness. Organisations consequently have a vested interest in implementing procurement policies that support these views.
Corporate social responsibleness (CSR) can be demonstrated through such things equally greenish procurement efforts, ethical sourcing, and environmental sustainability.
Simply how exercise you measure the success of CSR?
Calculating the return on investment for CSR programs is done using a like method to those used to measure out the effectiveness of marketing campaigns. Firstly, determine short-term and long-term goals and measurable KPIs. Calculate value and track results by collecting data to gain insights on whether CSR objectives are being met.
Successful CSR practices provide benefits to the community and the surround, but they also assist to drive business growth. If done well, CSR builds better brand recognition, good reputation and meliorate financial performance through increased sales and customer loyalty.
x. Supply concatenation cycle fourth dimension
Supply chain wheel time is the sum of the longest pb-fourth dimension information technology would take to fill a client order if inventory levels were at zero. This includes the fourth dimension undertaken for procurement processes, waiting time, shipping, and guild fulfilment.
The benefit of agreement this disquisitional metric is that it exposes pain points or uncovers competitive advantages. Supply chain cycle fourth dimension shows the overall efficiency of the supply chain. Long bike times hint at a ho-hum and impuissant supply chain, while short cycle times are an indication of an efficient and agile supply chain.
- Read more: Understanding The Difference Betwixt Lead Times and Inventory Bicycle Times
Measuring procurement performance
Procurement metrics and KPIs measure operational effectiveness, productivity, and the cost of sourcing goods and services from suppliers. Including effective spend assay in procurement processes volition help organisations attain full visibility of their procurement spend.
Metrics assist to place savings opportunities, manage adventure, and streamline procurement activities across business organisation units. They tin can also be used to ameliorate supplier relationship management, evaluate supplier performance, and ensure compliance.
Having a clear picture of your procurement costs, business needs, and market conditions will help to inform realistic brusk and long-term goals for businesses over the coming year.
Source: https://www.unleashedsoftware.com/blog/the-10-procurement-metrics-that-matter-in-2021