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Procurement KPIs (Key Performance Indicators) are management tools designed to monitor procurement department performance and help meet goals, strategies and objectives. Sustainability and constant improvement The primary goal of every procurement organization is keeping the procurement sustainable and constantly looking for ways on how to improve the procurement processes. The KPIs help point you in a direction improve performance levels, identify breakdowns in a process and are a driver of continuous improvement for more efficient and sustainable procurement processes. Characteristics of KPIs KPIs should be relevant your business or department and simple to use. When developing your first KPIs, five or six is more than enough. You don t want to become overwhelmed and find yourself serving the KPIs rather than having them serve you. Following KPIs shouldn t be about hours of gathering data. If you are establishing your first ones, start with just one or two so that everyone can understand them and their purpose. Later on you can add more. Before starting to establish KPIs, you should figure out what your stakeholders need and what are the company s strategies and objectives for the future. It starts with meeting the company management as well as other stakeholders (More info here). Look for ways the procurement department can help meet them, and then look for metrics that reveal your progress towards achieving those goals. There is no one-size-fits-all formula for all companies and the goals as well as the KPIs are most usually custom. Introduce the newly established KPIs to procurement organization employees as well as all the stakeholders. Everyone should be well aware about the metrics, the reporting as well as the goals of them. The metrics should then be signed off by management in order to maintain accountability, and later on they will be reported on in future business meetings. Copyright 2014 DeltaBid 2 www.deltabid.com

The goals of KPIs can be divided into three major groups according to their purpose: receive savings, increase quality and improve delivery. All three groups are tightly bound together and it s important to understand that these are like a three-legged stool: if you are setting up your KPIs from only one of the groups, you don t want to harm either of the other two because it might decrease supply sustainability. The following are KPIs you may want to consider using in your company See Quality KPIs here See Delivery KPIs here See Cost Saving KPIs here Copyright 2014 DeltaBid 3 www.deltabid.com

Focusing on cost savings can lead to late delivery or low quality - You don t want to find yourself in a situation where your company or project is waiting for missing strategic products/services and wasting high hourly costs just because you are focusing only on cost savings, and the cheap products/services you bought didn t arrive on time. Only set up what you can deliver It s smart to keep in mind that you should only set up what you can deliver since you don t want to find yourself in a situation where you are constantly reporting on not meeting KPIs. If that becomes the case, it means your KPIs weren t carefully chosen. The greatest output is achieved by balancing all 3 KPIs It s necessary to understand that cost savings, quality and delivery are mutually inclusive and focusing on only one attribute could result in an overall less efficient system. A balance between all three KPIs cost savings, uninterrupted supply and controlled stocks is required for greater output. Misusing KPIs can damage business processes You have to be careful with all of your KPIs since misusing them can unintentionally create behavior that the business does not want to encourage. You don t want to find yourself in a situation where business units and buyers are hanging on to stock that is redundant solely to protect KPIs when it is actually hurting business processes. Unnecessarily holding on to stock might also lead to depreciation, which further reduces the value of the stock. Different stakeholders may have conflicting KPIs When different stakeholders within the same team have conflicting KPIs and there is a KPI alignment issue between you and the organization, you need to consider initiating a dialogue to solve the problem in a way that s best for the company. Copyright 2014 DeltaBid 4 www.deltabid.com

Here you will find essential KPIs that help you to improve your procurement processes. Using some of the KPIs, may help you establish strategies to improve the delivery as well as continuity of your supply. Low competition among suppliers or a monopoly of a few suppliers leads to lower quality over the long run. Procurement should focus on increasing competition. There should be a limited number of suppliers that have a key impact (based on significant dollar spend percent) on the total cost of goods procured. Metrics to follow: The percentage or suppliers accounting for the 80% of spend. This can be calculated by counting article by article. The goal is to decrease the percentage. Competition among major suppliers for strategic supply. The goal is towards increasing the competition. The emphasis should be on suppliers that can differentiate you or provide you with a distinct competitive advantage. If your company faces continuity disruptions due to low quality, you might want to focus on increasing the quality of strategic materials. Metrics to follow: Setting a lower end quality standard for each article. Goal is to follow the quality standards. Low-quality products and services may affect product quality and add additional organizational costs. Do we procure materials and services that fulfill or exceed the requirement of our clients? This KPI quantifies the purchase quality of the procurement branch. Metrics to follow: Percentage of rejections. Goal: lower the percentage. Rejection of services from service providers. Lower the disapproval rate. Copyright 2014 DeltaBid 6 www.deltabid.com

Seller defect percentage. (Lower the defect rate, especially important if it directly affects customers). Identification of metrics such as defects per million (DPM). Measure the progress being made towards quality improvement. Direct supply quality standards. Goal: follow the supply quality standards. By lowering supply expiration, you will see an increase in production quality. This is especially important in the food industry, the chemical industry and IT. Product expiration rates can be improved by using procurement practices. Metric to follow: Percentage of supply expiring. Goal: lower the percentage. Low purchase order accuracy leads to higher operational costs and should be minimized. It should be measured across strategic supply articles, categories, buyers etc. Question to ask: are suppliers delivering exactly what was ordered and at the right time? Metrics to follow: Percentage of vendor services delivered without agreed service targets. Goal: decrease the %. Percentage delivered compared to what was ordered. Goal towards increasing the ratio. Errors over total number of purchase orders per period of time. Goal is to decrease the % of errors. Several quality metrics can be used to measure supplier trustworthiness. They are often evaluated to provide extra value to bidding processes. For low-value requests, trustworthiness is not measured, but for high-value requests (especially strategic products or services), it could play a significant role. Copyright 2014 DeltaBid 7 www.deltabid.com

NB: The following are indicators and don t necessarily guarantee the trustworthiness of a company. Metrics to follow: Suppliers with tax debts. Goal: lower the percentage of suppliers with debts. Years a supplier has been on the market. Lower the percentage of startup companies. Turnover rate. Aim to increase the % of companies with high turnover rates. Number of employees. Goal: increase the percentage of companies with a high number of employees. The percentage of certified strategic suppliers. These could be internationally approved standards, example: relevant ISO standards. Goal: increase the %. These metrics should all be weighted and used as a secondary dimension when evaluating bid results. Improving the percentage of bids following the standard tender/bid procedure can help increase the quality of products or services bought outside following the standard tender procedures. Metrics to follow: Percentage of procurement events that comply with standing procurement policies and procedures. Goal is to improve the %. Stakeholders, both internal as well as external, are regularly asked to rate their degree of satisfaction with Procurement s performance and offer recommendations if they so desire. You should also obtain feedback from suppliers since that might be directed towards quality as well as savings. The most vital area is obtaining more knowledge of what is critical to the paying customer. This knowledge can be used in many procurement-related activities. Copyright 2014 DeltaBid 8 www.deltabid.com

Question to ask: did we procure materials and services that fulfill or exceed the requirements of our clients? Metrics to follow: Percentage of key stakeholders who are satisfied with suppliers. Measure if satisfied or not (explain why) on numerical scale or satisfaction levels. Benchmark the results. Follow the recommendations of stakeholders. Goal: execute if possible. This KPI measures the procurement department s ability to satisfy its internal customers. Your procurement team s professional development helps gear your department towards excellence in all aspects of procurement, including quality. Procurement team members should be encouraged to obtain professional certifications, become industry experts and improve their overall knowledge of the business. These efforts should be awarded. Metrics to follow: Percentage of certified team members. Goal: increase. Percentage of team members with in-depth knowledge of materials. Goal: increase. Percentage of team members with in-depth knowledge of the industry. Goal: increase. Number of trainings per team member. Goal: increase to a minimum of one per year. Process transparency has multiple positive effects on overall procurement processes, like increasing quality, lowering maverick costs, increasing supplier participation rate. Metrics to follow: Transparent price information how transparent are the prices for the executives. Example: do they have access to every bid? The goal is to lower the percentage of blind requests. Copyright 2014 DeltaBid 9 www.deltabid.com

Are the procurement prices publically available to the stakeholders? Percentage of bidding processes that are documented. Goal towards increasing the percentage. Still Using Mail and Excel to Manage Your Procurement? Then you probably haven't heard about DeltaBid, a smart online procurement tool What makes DeltaBid special? 25-40% less time spent on Sourcing Full overview from a simple dashboard Easy to use, no training required Just Start a Free Trial It takes only 10 minutes to see what it's about. Like most procurement professionals you will probably fall in love with it. Copyright 2014 DeltaBid 10 www.deltabid.com

Here you will find essential KPIs that help you to improve your procurement processes. Using some of the KPIs, may help you establish strategies to improve the delivery as well as continuity of your supply. Getting materials at the right time is especially important for strategic supply since late delivery might affect supply chain continuity, and early delivery results in higher inventory and operational costs. How it s measured: Compare the frequency of on-time deliveries to early and late deliveries. Goal: lower the number of errors in an agreed-upon timeframe for deliveries. On-time delivery helps to: Maintain continuity. Improve inventory management. Save on costs. Lower supply chain risks. Running out of stock due to lack of raw materials (strategic supply) is the first thing to avoid for every company since its immediate consequence is interruption of continuity. Your whole factory or unit can t do their job and it costs you high hourly waiting costs. It may be even worse if the whole company is waiting. How to prevent out of stock: Preventing running out of stock is a combination of better inventory management, collaboration with strategic suppliers and procurement planning. The risks should be minimized as much as possible by optimizing all three areas. In emergency cases if operations are at risk, it may be necessary to buy something as quickly as possible even at a high cost, because waiting costs usually exceed higher material costs. Goal: prevent running out of stock. That should be a top priority for procurement department. Eliminating or minimizing the out of stock risk helps to: Maintain continuity. Save on costs. Copyright 2014 DeltaBid 12 www.deltabid.com

Lower supply chain risks. Lower operational costs. Emergency orders are non-planned actions used to prevent stock shortages, which is essential for maintaining continuity of production. The percentage of emergency purchases is an indication of the efficiency of your Procurement Planning Process. How it s measured: Percentage of emergency purchases done over a month or specific time period to the total purchases during the same period. It should be measured across strategic items. Goal: lower the % of emergency purchases Lowering emergency purchases helps to: Maintain continuity. Save on costs. Better plan procurement. Lower supply risks. Purchase order accuracy indicates whether the suppliers are delivering the right quantity of the right goods. Low purchase order accuracy might result in: Extra inventory or operational costs. Short quantity can interrupt continuity. This is especially important in industries where the strategic materials expire quickly, example in food industry. How it s measured: Calculate the percentage of purchase orders with line item, pricing, supplier data, quantity or delivery date, and addressing errors over total number of purchase orders per period of time. Purchase order accuracy is usually different for different buying channels or categories. Goal: improve purchase order accuracy. Improving the purchase order accuracy helps to: Copyright 2014 DeltaBid 13 www.deltabid.com

Save on costs. Obtain a higher quality. Managing your inventory better will improve availability of materials as well as improve continuity of supply. Improving inventory management has multiple benefits for the company: including lowering costs as well as minimizing the indirect material stored in the inventory. In smaller companies, inventory is usually managed by a supply chain manager and in bigger companies, by an inventory manager. Whichever the case, it should be seamlessly coordinated and controlled. How to reduce inventory: Strategic supply inventory is reduced by setting minimal and maximal stock resources for each article and following them on a daily basis. (Below the minimal quantity can harm continuity and above the maximum just adds expenses for inventory management and ties up the money.) Indirect material inventory resources should be minimized or eliminated if possible. Goal: reduce inventory and improve inventory management. Reducing and better managing inventory leads to: Lower financing on inventory and improve work capital. The money is tied up in inventory. More free space in the inventory for other products. Improvement of supply continuity. Cost savings. Availability of materials. Lower operational costs. Expiration management is about reducing the number of products that expire before use through Good Procurement and Inventory Practices. It can be included in the discussion on-time delivery, purchase order accuracy and inventory management, but in some industries, expiration management is significant by itself (makes up a science). Example: industries where the supply expires fast (e.g. food industry). Copyright 2014 DeltaBid 14 www.deltabid.com

How to manage expiration: Purchase orders have to be thoroughly calculated. You want to make sure incoming material quantities don t exceed the delivery order. This should follow established expiration management procedures. Goal: minimize or eliminate materials expiring in inventory. Improving expiration management helps to: Lower costs. Lower inventory and operational costs. Increase supply quality. Improve your company's risk management strategies by making sure your suppliers are not too dependent on you. Limit the % of their turnover done with you to 30-50% max. How to manage expiration: Calculate the percentage of your spend per supplier based on the turnover rate of each particular supplier. The turnover rate should not be higher than 30-50%. Goal: minimize the percentage of your spend on the supplier based on the supplier's turnover rate. Still Using Mail and Excel to Manage Your Procurement? Then you probably haven't heard about DeltaBid, a smart online procurement tool What makes DeltaBid special? 25-40% less time spent on Sourcing Full overview from a simple dashboard Easy to use, no training required Just Start a Free Trial It takes only 10 minutes to see what it's about. Like most procurement professionals you will probably fall in love with it. Copyright 2014 DeltaBid 15 www.deltabid.com

Here you will find essential KPIs that help you to improve your procurement processes. Using some of these KPIs, may help you establish strategies to save on your company costs. This KPI measures the percentage of managed spend compared to the total spend when buying external products and services for the company. In organizations with centralized procurement, managed spend can be calculated as the total of all spend run by the organization. How it s calculated: The goal of this KPI is to have more spend follow standard procedures, thereby saving on costs. For indirect spend, cost savings should be at the top of your agenda since discontinuing supply will not be considered critical to business. Cost savings can be achieved in multiple ways: Generating higher competition among suppliers. By using benchmarking and comparing supplier participation rate results. Establishing bid rules. It is common to use the three-bid rule if the request has less than three bids, it has to be run again. You can measure how many requests have three, four or more bids. The goal is to increase the % of higher numbers of bids. Establishing detailed rules and increasing the transparency of indirect purchases to lower maverick spend. Finding the way to save on costs for direct purchases is essential for every procurement organization. However, they are not easily achievable since buying operations are usually highly optimized. There may be hidden risks that can harm delivery or quality and affect supply continuity. Copyright 2014 DeltaBid 17 www.deltabid.com

Find external suppliers for products or materials. Example: lot of companies look for cheaper products or materials from Asian countries. In this case you can measure the % of strategic supply from Asian countries. This should be implemented step-by-step and progress of quality, delivery and % of overall spend should be followed. Slowly increase the percentage if no quality or delivery issues arise. Invest extra resources or even buy the strategic supplier company. This should be considered a long-term investment and KPIs should be developed for each case separately since they are unique. Look for replacement products or services. Measure the % of replaced products or services. Focus on making sure the price quoted is the price paid. This can reduce cases of overpaying the supplier. Usually indirect spend, primarily services, have lower compliance rates. A clear policy with agreements and penalties helps to increase the compliance rate and leads to more accurate bidding. The rogue spend will decrease when suppliers know that they are being monitored. Ultimately this lowers the number of extra paid prices. Indicators to follow Percentage of disputed invoices to total invoices. Calculate the total difference for ratio of price paid to price quoted. The goal of both KPIs is to raise compliance. Direct savings can be received by reducing maverick costs, which may be up to 20%, and corruption. Both may be difficult to measure. However, the results are easy to notice once processes become transparent. Running RFPs via mail, especially outside the procurement department elevates the risk of paying maverick costs. Using special procurement software can easily reduce maverick costs. Copyright 2014 DeltaBid 18 www.deltabid.com

Indicators to follow: Follow the number of requests run outside the procurement department via mail. Special solutions like DeltaBid eliminate the risk of maverick spend. Aim towards decreasing the number. Improve processes and use benchmarking to identify savings. A high percentage of payable invoices without purchase orders is an indication of low competition amongst suppliers, which usually leads to higher product or service costs. How to reduce: Follow the percentage of purchase orders payable without purchase orders for a period of time. Use benchmarking to follow the differences in costs. Goal: reduce the percentage. NB! Focusing only on immediate cost savings can lead to low quality or delivery and can interrupt continuity. Copyright 2014 DeltaBid 19 www.deltabid.com

Inventory reduction leads to less stock, which leads to zero or low financing on inventory and zero or no mark-up. This results in cost savings and lower operational costs. Indicators to follow: Setting upper and lower norms for each strategic stocked product or material. The KPI should follow the norms on a daily basis and each deviance needs special treatment. Exceeding the upper level increases operational costs. Below the lower end continuity of supply is threatened, which might lead to extra costs. Minimize stocked indirect materials, measured by capacity etc. This improves work capital and lowers inventory management costs. Lower load of stock in inventory leads to more space for other products and lower inventory management costs. If your company has interruptions in continuity due to problems, such as a certain geographic locations or industry specific problems, there may be ways to commute these interruptions, which usually then leads to cost savings. Interruptions in continuity are usually associated with high costs, so your first goal is to avoid them. If that s not possible, then commute the interruptions. Indicators to follow: Follow the number of interruptions. Analyze the results and look for ways to improve. Prepare a special spare in case of an emergency. Analyze how it helps to overcome the problem. Copyright 2014 DeltaBid 20 www.deltabid.com

Improving the quality of direct supply helps lower the cost of the supply. This KPI quantifies the purchase quality of the procurement branch. Indicators to follow: Agree on special metrics that reveal the quality of direct supply. Reflect the percentage, laboratory experiments, etc. and follow them on daily basis. Tip: often you cannot negotiate lower prices, but instead try to agree on higher quality within the established price. This will lead to indirect cost savings. If you are dealing with raw materials and have an expiration problem, such as the food industry, agriculture, chemistry, and IT, then you may find ways for cost savings through lowering the rate of expiring products by better management. Indicators to follow: The quantity and number of expiring products. Goal: lower the number. This can be done through better inventory management, following norms for stocked quantities etc. In some industries, cost savings can be achieved by improving the on-time delivery or products or services. For example: early delivery increases operational costs and late delivery ends in high waiting costs. It plays a significant role in industries where the strategic supply is usually not stored in inventory (example: in construction). Indicators to follow You can follow the behavior of the suppliers, categories, etc. Goal: improve the strategic supply s on-time delivery. If your strategic suppliers have problems related to on-time delivery, you should find ways to improve their behavior, which will then lead to cost savings. Copyright 2014 DeltaBid 21 www.deltabid.com

Higher quantity of delivered items increases operational costs and might result in unplanned inventory storage. Lower quantity might result in continuity interruptions and higher operational costs since you have to source faster than planned for new stock. Indicators to follow: Follow the quantity of delivered items. Goal: reduce errors in delivery quantity. Establish and use special agreements and penalties. Goal: follow the results using benchmarking. Still Using Mail and Excel to Manage Your Procurement? Then you probably haven't heard about DeltaBid, a smart online procurement tool What makes DeltaBid special? 25-40% less time spent on Sourcing Full overview from a simple dashboard Easy to use, no training required Just Start a Free Trial It takes only 10 minutes to see what it's about. Like most procurement professionals you will probably fall in love with it. Copyright 2014 DeltaBid 22 www.deltabid.com