2020-2021 GLOBAL SUPPLY CHAIN MANAGEMENT AEI-M1 / L.

FALL

Part 3

Purchasing and procurement performances

1. The Purchasing Performance
2. The Procurement Performance

1. The purchasing performance

The critical step in purchasing need analysis.

First of all the company must clearly identify its needs and their relevant assessments.

During the need assessment process there are two categories of risk:

 Risk of underestimating
 Risk of overstatement

To define and secure at best its needs the company uses the SAFE (Sequential Analysis of
Functional Elements) requirements analysis method.

The purchasing function used to be part of the production function and enjoyed very little
status in the organisation.

Over the past few decades, however, the purchasing activity has grown in stature through
recognition of the contribution it makes to the success of any enterprise and it is now
recognised as a separate function:

1. It is interesting to consider the enormous impact efficient purchasing (or procurement as

it is often called) has on the costs of an organisation. By rational buying the purchasing
department can generate profit immediately.
The huge responsibility falling on those concerned with purchasing, therefore, is clearly
visible. This has come about because of the increasing size of organisations, the increasing

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complexity of materials and components and the extreme competition met in the modern
market.

2. The purchasing function differs from most others in that those carrying out this work are
to a large extent tied to their own industry. However, there are many activities within the
purchasing function that are common to many industries and other types of enterprise.

Common Purchasing Activities:

Activities common to most industries are:
(a) All buyers will need to have a wide knowledge of the markets from which they have to
make their purchases, whether these are raw materials, manufactured components or as in
wholesale and retail trading finished goods. The knowledge will extend to how the suppliers
perform in regard to reliability and delivery performance.
(b) In most manufacturing industries buyers will have to interact closely with the production
department to ascertain their precise requirements. In retail selling the buyer has a key role
in the success of the enterprise in that he (or she) must closely watch consumer behaviour
and attitude their taste and demand.
(c) Though inventory control may or may not be the direct responsibility of the purchasing
officer, he is primarily responsible for ensuring that sufficient supplies of materials or
components are available to maintain continuity of production or sales. The buyer may do
this by contracts with suppliers for regular deliveries or by building up stocks to be used as
and when required.
The former keeps a minimum of capital tied up in store but there is always the risk of
suppliers not keeping to delivery undertakings. The suppliers in their turn try to ensure that
materials or components are readily available.
(d) In most organisations the purchasing department is responsible for negotiating purchase
prices and terms of credit.
(e) Purchasing is also generally responsible for ensuring that the goods ordered and invoiced
are actually received and that the price charged are those quoted. To mimimise risk,
necessary checks are to be carried out by people not directly involved in placing the orders.
(f) Purchasing will constantly monitor expected deliveries to ensure that suppliers fulfil their
commitments regarding quality and delivery dates.
(g) Purchasing will constantly investigate the market
(i) To seek better products, prices, terms or deliveries;
(ii) To find out alternative suppliers to ensure continuity of deliveries in case the main source
suddenly fails for any reason.
Purchasing Relations with Other Functions:
1. The purchasing department probably has direct relations with more functional
departments throughout the organisation than any other single department.
2. Its primary relationship in manufacturing and similar industrial enterprises is with the
three aspects of production engineering, production planning and production control. It
serves production engineering by advising on the availability and costs of both equipment
and materials.
The buying department, by its constant investigations into all the appropriate sources of
supply, has a wide knowledge and experience with which to advice on these important

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matters. A similar service is provided for production planning where information concerning
availability and continuity of supplies is vital if production is to be planned effectively.
Equally, production control benefits from the activities of the purchasing department since
this department is concerned with monitoring delivery performance of suppliers and finding
out alternative sources of supply if delays or breakdowns in the main sources of supply occur
or are likely to occur in near future.
3. The purchasing department also has a direct relationship with the marketing function. It is
because customers’ remarks and complaints, especially in respect of material quality, have a
direct bearing on what is purchased and, sometimes, where.
4. Purchasing is also very much to do with finance: the buying department is a major
spender in any organisation. Its link with the accounts department is, therefore, obvious.
Credit terms in regard to payment times and cash discounts are as important as the actual
purchase prices.
Again, proper timing of purchases can have a positive effect on working capital. If, for
example, credit terms are for remittance at the end of the month following delivery, then
orders for delivery in the first week of a month allow for two months’ credit before payment
is due.
Many such devices are also used by the purchasing department to benefit the financial
aspect of the organisation, very often, for example the buyer may be able to strike a good
bargain for the organisation, and an efficient purchasing officer is one who is always alert
and is able to make use of such favourable offers.
On the other hand, prudence must always prevail in this connection as the costs of storage
can easily absorb may savings made by favourable prices.
Purchasing Policy:
As with other functions, there must be a clear policy on purchasing laid down. This is, of
course, ultimately the responsibility of top management, but the purchasing officer will have
a great deal of advice to give on this matter:
1. Perhaps the first item of purchasing policy to be considered will be the level of stocks to
be carried. The normal pattern of deliveries by suppliers may determine this. If supplies are
generally constant then reliance can be placed on a continuing receipt of goods ordered, but
if they are erratic it may be more prudent to establish a stock to ensure regular input to
production.
Costs of holding stores, quantity discounts, the possible financial implications of production
stoppages, and vulnerability to deterioration and to theft will all play a part in making this
decision.
2. Secondly, certain raw materials are subject to wide price fluctuations. So it may be both
rational and profitable to purchase large quantities when they become available at low
prices. There are two advantages in doing this. First, the production department gains the
benefit of low-priced inputs which will lead to lower selling prices.
This will give the final products a competitive price edge. Alternatively, the lower cost may
give an opportunity to make higher profits if there is a market for the company’s product.
Second, when raw-materials prices rise the organisation may be able to dispose of its surplus
stocks at a profit and, thus, make a gain just by holding the stocks.
3. Thirdly, is entering into short- or long-term contracts for the purchase of materials to be
part of the purchasing policy or is it to be the policy to go to the market as and when

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materials are actually required? When prices generally are rising, or when supplies are
difficult or uncertain, such a practice is attractive.
On the other hand, being committed to one supplier at fixed prices may be damaging if
prices fall suddenly or supplies from the contractor fail for some reason.
Objectives of Efficient Purchasing:
The objectives of efficient purchasing can be set out in the “seven rights” which may be
expressed to buy:
a. the RIGHT goods
b. at the RIGHT price
c. in the RIGHT quantity
d. of the RIGHT quality
e. at the RIGHT time
f. delivered to the RIGHT place
g. on the RIGHT terms

These the seven aspects of efficient purchasing—are self-explanatory and enter into all
buying operations.

Stock Control:
1. The question of whether stocks of materials and components should be the responsibility
of the purchasing function has no universal answer. Some undertakings have such stocks
under the control of production on the basis that the physical availability of these items is
part of the manufacturing function.

Others say that as the purchasing department is responsible for procurement then it is this
department’s responsibility to control and account for stocks. Many others believe that
storage and stock control should be a department separate from either, particularly as the
financial value of stocks held is usually very considerable.

2. These three points of view are really relevant only where operations are conducted on
one site or on a very small number of nearby sites, and relate largely to manufacturing
activities. Other industries and activities such as building construction where operations are
carried out on sites have the question answered for them. Every building site and every civil
engineering site, for example, must of necessity have materials and components at hand
under the direct control of the site manager (by whatever name he is known).

3. The main objectives of stockholding and stock control are to ensure an adequate flow of
materials and components required for the organisation’s operations, to keep minimum
stocks commensurate with operational requirements to ensure the good physical condition
and safety of the stocks held and to reduce the possibilities of fraud and theft as much as
possible.
The procedures required to carry out these objectives will vary according to the types of
stores held) their physical disposition and the rates of usage.

4. Finally, there seems to be no common usage of the words stock(s) and stores and they are
used in the same sense most of the time.

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Measuring Purchasing performance is essential for effective management and continued

improvement of the purchasing function.

Purchasing evaluation provides vital feedback to the purchasing department as well as top
managements for assessing the effectiveness of an organization’s purchasing strategies and
decision-making processes.

Overall performance of an organization is strongly affected by how well the purchasing

function can contribute to the firm’s strategies and goals.

Purchasing plays an ever increasingly important role in the supply chain especially in an
economic downturn.

Cost reduction of raw material and services can allow companies to competitively market
the price of their finished goods to win in a business.

An obvious performance measure of the success of any purchasing department is the

amount of money saved by the company.

A better understanding of how purchasing professionals and internal customers evaluate

purchasing performance is needed to improve the overall effectiveness and efficiency of the
organization.

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Purchasing Departments are tasked in sourcing goods or services at the best possible price
with the Right Quality the Quantity the Right Delivery. The possibilities of procuring cheaper
materials with quality desired from alternative sources as part of their daily activities.

Evaluating Purchasing Performance

An organization would need a systematic approach if they want to efficiently evaluate the
purchasing performance which may lead to the following benefits:

1. Better Decision Making – From identified variances of planned results and actions can be
taken in the future to prevent further occurrences.

2. Better Communication – Such as analyzing certain invoices which would need an extra
check that would lead to better payment arrangement procedures and improve
understanding between purchasing and administration.

3. Better Visual – It makes things more visible with regular reporting against actual vs
Planned this enables a buyer to verify whether their expectations have been realized.

4. Better Motivation – An evaluation system can meet the personal and motivational needs
of each purchaser which can be used as constructive goal setting and developing personal
programs in purchasing.

There are several performance measurements that businesses can use when they measure
purchasing performance:

Purchasing Efficiency – Administrative costs are the basis for measuring purchase efficiency,
this performance measurement does not relate to the amount purchased items that the
department has procured but the measurement relates to how well the purchasing
department is performing in the activities they are expected to perform against the budget
that has been placed. If the purchasing costs are within budget, then the efficiency of the
purchasing department has met its expectations. If the department is using funds over and
above the budget then the purchasing function is not efficient.

Purchasing Effectiveness – Price that is paid for an item will not be necessarily a good
measurement of performance. Prices may fluctuate due to market conditions, availability
and other demand pressures in such situations purchasing departments may not be able to
control the price A popular method of assessing purchasing effectiveness is to review the
inventory turnover ratios. The ratio measures the number of times, on average that the
inventory is used, or turned, during the period.

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Purchasing KPI Management Tool

Purchase Management determine which activities are key areas and justify the effort of
evaluation. Key Performance Indicators (or KPIs) are management tools designed to analyze
procurement department performances to achieve goals, strategies and objectives. They are
also crucial to ensure that procurement is sustainable and that purchasers are constantly
looking for ways on how to improve procurement processes.

KPIs help to point in the direction where it improves performance levels. Improvement for
more efficient and sustainable procurement processes.

The three major groups of Purchasing KPI are Cost Savings, Quality, and Delivery of
purchased items.

Cost Savings KPI’s

Measuring the percentage of managed spend against total spend on purchases for external
products and services. Managed spend can be calculated as the sum of all spend run by an
organization. Goal of this KPI is to have more spend standard procedures, thereby saving on
costs. And Reducing Consumption to determine if it’s necessary, an organization can exclude
things that they can they can do without or substitute, for example the reduction of travel
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expenses by deployment of video conferencing. Consolidation of spend hidden costs can

arise if specifications are harmonized such as Mobile Phones laptops and lease cars which
could lead to savings. From suppliers, Improving competition among suppliers for cost
saving, generating higher competition among suppliers, By using benchmarking and
comparing supplier participation rate results.

Quality KPI’s
Products and services of low quality would affect an organizations product quality which
might add additional costs. KPI quantifies the purchase quality of the procurement branch.
Metrics such as percentage of rejections, goal is to lower these percentages, rejected
services from service providers, lowering the disapproval rate. Seller rejection rate rejected
goods which is important if it directly affects customers. Disruptions due to low quality, if the
company is facing continuity disruptions due to low quality focus on increasing the quality of
strategic materials. Setting a lower end quality standard for each article and the goal is to
follow the quality standards.

Delivery KPI’s
To establish strategies that can improve delivery as well as continuity of supply. Strategic
supply is important for organizations, late deliveries might affect supply chain continuity,
early deliveries can result in higher operational/Inventory costs. The goal is to have lower
number of errors against the requested time frame for deliveries. Deliveries that are on time
helps to Maintain continuity, improve inventory management which leads to cost savings.
The Accuracy of purchase orders is the outcome of suppliers delivering the right quantity of
right goods. Inaccurate purchase orders might result in additional inventory or operational
costs and shortage in quantity can interrupt continuity.

Factors Influencing Purchasing performance

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Factors that influences purchasing performance measurement.

It’s how an organizations management looks at the role and importance of function.
Management evaluates purchasing operations on parameters such as:

Operational and administrative activity: Management evaluates purchasing operations

primarily on parameters such as order backlog, administrative lead-time, number of orders
issued, numbers of requests for quotations issued, adherence to existing procedures, etc..

Commercial activity: Management is aware of the savings potential which purchasing may
represent. Parameters being used here are the total savings reported by purchasing, number
of quotations issued, variance reports, inflation reports, etc..

Part of integrated Logistics: Management becomes aware that price hunting has its
drawbacks and may lead to sub-optimization. Evaluation is aimed at quality improvement,
lead time reduction and improving supplier delivery reliability.

Strategic business area: Purchasing is actively involved in deciding the company’s core
business and reinforces the company’s competitive position. Management evaluates
purchasing amongst others on the number of changes in its supply base, number of tenders
and e-auctions, and its contribution to the bottom line in terms of savings realized.

Establishing KPI
An organization should figure out what stakeholder’s interest is and along with the
company’s strategies and future objectives. KPI’s are usually customized, looking for metrics
that reveal progress towards achieving goals.

Analysis of the data: management should look for interrelationships between means and
ends.

Following the analytical stage, various measures are developed, implemented and
subsequently refined. Prevent measures becoming too complex and too numerous, as
simplicity is key.

KPIs should be relevant to your business or department and simple to use. Key Indicators of
five or six would be enough, and not being overwhelmed by data it should not be about
taking hours gathering data.

Conclusion
There is no one-size-fits-all formula for every company. Goals as well as KPIs are most usually
custom.

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Several studies have been carried out on purchasing performance and the results are that
there is no one method that will cover every purchasing department.

However common key area measures that is found to be common in evaluating

performance. Namely, cost saving, vendor quality, delivery metrics and price effectiveness.

Although these key measures are common, the weight placed on these measures are by no
means uniform and will vary between industries, businesses and services. In addition, the
importance of these measures to the overall effectiveness of a purchasing department will
change over time and therefore need to be assessed and modified periodically.

2. The procurement performance

As a reminder purchasing is just a part of procurement as it only involves acquiring of goods

and services by firstly placing orders to the selected supplier then receiving goods from them
and finally paying off the supply price of goods to the suppliers. Then purchasing is just one
aspect of the wider procurement function, and includes activities such as ordering,
expediting, receipt of goods into stock, and payment to suppliers.

Whereas, procurement has the wider scope which not only includes purchasing but also
includes market survey, sourcing, identifying potential suppliers, selecting supplier,
negotiating price, performing quality checks, establishment of good relationship with
supplier, etc..

Procurement concentrates on the strategic process of product or service sourcing, for

example researching, negotiation and planning also.

And exactly for these reasons that procurement is a vital business function and impacts the
performance of an organization. It may affect product quality, costing, timely delivery, and
customer satisfaction.

So it is important for organizations to monitor and improve performance and health of

procurement. Procurement KPI metrics help organizations to track and report performance
and effectiveness of procurement in meeting business objectives.

The value of measuring the performance of external suppliers, distributors etc.

Understanding current performance, comparisons over time and using data to better
understand areas for improving performance of procurement are some of the key benefits
of developing as assessing KPIs.

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In addition to the performance of individual suppliers, the procurement process as a whole

can be monitored to assess the extent to which the end-to-end process is optimum in terms
of time, quality and value for money.

Improving Performance in Procurement Through Establishing KPIs

Key performance indicators (KPIs) can be used to analyse data based on performance
objectives and set actionable goals for improvement.

KPIs can be developed in conjunction with suppliers as well as others, and can be used to
measure the essential elements of the process.
KPIs enable the procurement department to control and optimize the quantity, quality,
costs, timing and sourcing of purchasing processes.

A procurement KPI or metric is a measurable value that tracks all relevant aspects of
obtaining or buying goods and services.

These measures can be developed at any time, but are often agreed at the beginning of a
contract.

It is important to agree measures which can be assessed easily, in terms of the availability of
the data as well as the data itself being objective and beyond dispute of either party.

The KPIs and metrics used will differ from organisation to organisation, but the following 15
most important procurement KPIs and metrics are some of the commonly used indicators to
help to measure and improve the performance of procurement, and can be categorized into
two types: KPIs for Quality and KPIs for Cost.

1. Supplier Defect Rate: Evaluate your suppliers’ individual quality

2. Purchase Order Cycle Time: Know who to address your urgent orders to
3. Number of Suppliers: Track your level of dependency towards your suppliers
4. Supplier Quality Rating: Analyze the quality of your suppliers
5. Supplier Availability: Measure suppliers’ capacity to respond to demand
6. Lead Time: Understand the total time to fulfill an order
7. Compliance Rate: Understand if suppliers fulfill your requirements
8. Cost of Purchase Order: Control the internal costs incurred by each purchase
9. Procurement Cost Reduction: Streamline the tangible costs savings
10. Procurement Cost Avoidance: Avoid potential extra costs in the future
11. Emergency Purchase Ratio: Track the number of your emergency purchases
12. Purchases In Time & Budget: Monitor purchasing time & budget
13. Procurement ROI: Determine the profitability of investments
14. Vendor Rejection Rate & Costs: Examine your quality management strategies
15. Spend Under Management: Track and optimize your expenditures

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Evaluating Procurement Performance

KPIs for Quality

1. Defect Rate: Evaluate your suppliers’ individual quality

This is used to measure the amount of product faults.
Depending on the type of product manufactured and the volume at which it is
manufactured, this KPI may be measured as faults per unit or defects per million.
This is a procurement KPI that is crucial when it comes to determining the final quality of a
product.
It measures the percentage of products received from suppliers that do not meet the
compliance specifications and quality requirements.
The supplier defect rate is more critical in some industries that have high-risks and multi-
tiered supplier bases like the aerospace and defense or the automotive.
Tracking your different suppliers’ defect rates and break it down into defect type will provide
you insights on which supplier is more performant and reliable than other, and what type of
errors are done.

On the example below, it is obvious that the first supplier is more reliable than any of the
five others: within the 1% of defective goods supplier 1 has, 80% of them still have no
impact.

=> Performance Indicator

Measure and track the different defect rates amongst your suppliers and identify the ones
that are performing best and that are the most reliable.
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2. Purchase Order Cycle Time: Know who to address your urgent orders to
The purchase order cycle time is a procurement KPI that covers the end-to-end ordering
process, from the moment a purchase order is created to the order approval, receipt, invoice
and finally payment of the order. It focuses on the order and does not include the creation
and delivery of the product or material itself.

It is a key KPI in measuring the performance of procurement activity.

Purchase order cycle time is time between receipt of purchase requisition to releasing a
purchase order to the vendors.
This KPI indicates the preparedness of the procurement team. It reflects how efficiently the
procurement team is able to execute intermediate tasks such as sending RFQs, receiving and
comparing quotes, approvals, etc..

On the example below, the cycle decreased to 3,9 days at its minimal in March 2017, before
increasing up to 6,3 days in June. The suppliers are divided into three categories classifying
their purchase cycle time: short (4 days or less), medium (5 to 8 days) or long (over 8 days).

This is a factor to take into account when purchasing: if the order is urgent, you may need to
know which supplier is able to handle it quickly.

=> Performance Indicator

Reducing your cycle time can improve the turnaround of other key activities, and improve
staff productivity and the overall cost of the procurement function.
Shorter purchase order cycle time confirms an efficient procurement strategy.

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3. Number of Suppliers: Track your level of dependency towards your suppliers

This KPI tracks the evolution of how many suppliers the company has.
Depending on very few suppliers can be a risk for procurement. Relying on too few suppliers
and not diversifying your sources creates a risk of dependency, and potential further
problems if one of them pulls out at the last moment. This should be avoided.
On the other hand, having too many suppliers can also reduce the chances of competition
among supplier, and reduce also the possibilities of discounts.
Organizations should maintain healthy numbers of suppliers for all items category.
Further, organizations may have a specific contract with these suppliers regarding defined
terms, price and period of contract.

On the example below, the KPI shows the evolution of the number suppliers over the years,
divided into two categories: contracted suppliers and unlisted ones. Often enough,
companies prefer contracting suppliers so that they agree with their terms of compliance –
but not all suppliers agree, so they are unlisted. The contracted partners can be classified as
gold, silver or bronze according to certain criteria measuring the relationship through
discount, reliability, etc.

=> Performance Indicator

Apart from the level of dependency, the optimal number of suppliers you need should be
measured using other metrics like the quantity discount they provide you with, and the
defect rate of their supplies.

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4. Supplier Quality Rating: Analyze the quality of your suppliers

This KPI evaluates the performance of suppliers on various parameters.
Few key parameters can be quality of material and invoice accuracy.
The quality rating is one of the supplier performance metrics critical in evaluating present as
well future relationships with suppliers. If the designated supplier continuously delivers a
lower quality score, then their status may be downgraded, or corrective measures
implemented until issues in the supply chain are resolved.

For example, if the supplier availability was low, and you cannot rely on their stock, your
business can, consequently, suffer due to lack of products. The point is to monitor suppliers,
try to reach the highest quality score (above 90%), and re-evaluate the percentage of
returned items, availability, and the defect rate, in order to renegotiate future contracts and
agreements.

=> Performance Indicator

Establish a system of evaluating the quality of your suppliers backed with data and analytics
like in the example above. Set clear goals and monitor the performance of suppliers in detail.
Supplier rating helps in identifying the strength of the current supplier base.
It helps in identifying strong and weak suppliers.
Companies can use supplier rating to identify, reward and retain well-performing suppliers
and to identify, take corrective action regarding weak suppliers.

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5. Supplier Availability: Measure suppliers’ capacity to respond to demand

This KPI evaluates the performance of suppliers on response rate, on-time delivery of
material, etc.
It refers to the number of times goods were available on the supplier’s side, or to the
number of orders placed with the supplier. In an era of fast-changing consumer habits,
where the lines between different channels are blurred, and where mobile-commerce,
online purchases, in-store consumer-specific marketing all merge in one retail experience, it
is important to manage suppliers as efficiently as possible to guarantee availability of stocks.
By monitoring the evolution of your supplier’s availability of stocks, you know the degree of
reliability you can place in them.
This KPI evaluates the quoted delivery time compared to actual delivery time, how often the
product/service is delivered earlier or later than promised and by what length of time it is
early/late.
How the actual delivery time impacts your own product schedule can also be taken into
account.

=> Performance Indicator

Maintaining your supplier’s availability over 90% ensures a good functioning of your supply
chain and a greater level of efficiency.
Again supplier rating helps in identifying the strength of the current supplier base.
It helps in identifying strong and weak suppliers.
Companies can use supplier ratings to identify, reward and retain well-performing suppliers
and to identify, take corrective action regarding weak suppliers.

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6. Lead Time: Understand the total time to fulfill an order

This KPI measures the interval of time between the initiation of a procurement action, and
the receipt of the production model into the supply system, purchased as a result of such
action. Lead time is the time interval between releasing a purchase requisition to receiving
the materials in the warehouse.
In other words, it is the latency between the initiation and the execution of a process. It is
composed of production lead time and administrative lead time. For instance, the lead time
between the placement of an order and the delivery of printed circuit boards from a
manufacturer can span from 2 weeks to 3 months, or sometimes more.
Lead time is different from purchase order cycle time as it starts when the request is made
till the final delivery and testing, while cycle time ends at the confirmation of the order.
Lead time depends on various other factors such as purchase order cycle time, order
handling time, manufacturing lead time, delivery lead time, etc.
Set a target amount of days under which the lead time should stay; if you see that it
repeatedly fails it over time, measures should be taken.

=> Performance Indicator

The idea is to reduce lead time as much as you can while keeping a good quality level.
Lead time has a direct impact on inventory level. A higher lead time means a higher
inventory level.
Then an effective procurement strategy can lower the lead time and reduce the inventory
level.

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7. Compliance Rate: Understand if suppliers fulfill your requirements

This is the compliance with the original contract.
This KPI represents the whole of basic agreements a company and a supplier lay down.
It results in various requirements such as the maximum reaction time in case of any issue,
the delivery time, special discount offers, etc.
It is a key component in providing guidance and insights into processes, and participates in
saving costs through better negotiations with suppliers.
Then be always ensured that the supplier is keeping to agreements on pricing, delivery
times, etc. based on the negotiations agreed at contract signing stage.

On the example below, the compliance rate is of 68% overall, and it is broken down per type
of suppliers: the highest compliance rate is with software suppliers, with 75%, while the
lowest is with digital services with 9% of compliance.
It also tracked the general evolution over five years, with a pre-set target of 60% that is
reached in 2016 and 2017.

=> Performance Indicator

For an average company that is not operating world-wide with millions of suppliers or end-
users, reaching an overall of 50% of compliance is a good target to set.

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KPIs for Cost

8. Purchase Cost KPIs: Control the internal costs incurred by each purchase
It is the cost of purchase order.
This KPI calculates the average cost of placing a purchase order.
The cost of purchase order is one of the disputed procurement KPIs, as the definition and
application vary. In theory, this metric represents the average costs of processing an order,
from purchase creation to invoice closure.
There are various definitions for calculating the cost of purchase order e.g. whether you consider the
cost of indirect staff involved in the purchase. Each company can define and apply its own definition.
In practice, the costs to process internally the purchase order can include a staggering list of
variables. The company has to decide and consider what is the average cost to process a
purchase order, based on how long it takes to do so, by the staff directly or indirectly
involved.

On the example below, we have an average of (13,144/804) €16.34, which is within the
range.

=> Performance Indicator

This KPI helps in measuring and in improving the efficiency of procure to pay cycle, so as to prevent
errors and reduce costs.

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9. Procurement Cost Reduction: Streamline the tangible costs savings

Cost reduction is central amongst the procurement KPIs of the cost management dashboard.
It wants to measure the tangible “hard savings” that you have performed in terms of cost
management over the years.
Cost reduction is also referred to as hard savings.
You can easily measure them by comparing directly the old costs versus the new ones for the
same good or service:

Cost Reduction = Actual Purchasing Price – Last Price Paid

On the example below, we see that it went from €260k up to €480k five years later. It also
breaks down the cost reduction by supplier category (switches, battery, display, etc.) and we
see that the transistors’ section has the highest savings.
There are a lot of best practices to adopt to reduce the costs: you can streamline your
supplier lifecycle management, increase efficiency by leveraging supply chain analytics, or
train your staff on how to save costs.

=> Performance Indicator

Monitor your costs reduction over time in order to increase it in the long-term.
It is a key metric for top management as it has direct influence on the income statement.

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10. Procurement Cost Avoidance: Avoid potential extra costs in the future
This procurement KPI focuses on the actions undertaken to reduce potential future costs,
like replacing parts before they fail, and inevitably damage other parts.
These are savings from the actions taken to reduce future task.
These saving are intangible to measure.

Cost avoidance is also called soft savings by opposition to the “hard” ones, since they do not
directly appear on the bottom line in a quantifiable way, but can still have a positive impact.
It can be neglected by the top management since it doesn't directly affect the income
statement.
Cost avoidance creates important strategic value as it often targets strategic spend like new
investments or technologies that have no comparable purchase for instance.
On the example below, it is calculated as a percentage that can be broken down into the
different categories of suppliers that you can track alongside the cost savings performed, to
better measure the impact of your efforts:

=> Performance Indicator

Few examples of cost avoidance activities are rate contracts or price protection, negotiation
after initial quotes, asking for value-adds such as add-on services, continuous improvements
for saving, finding substitutes.
Develop a strategy to map the cost avoidance internally and combine it with the cost
reduction in order to avoid future extra costs.
The cost avoidance KPI can be used to measure the future cost savings.

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11. Emergency Purchase: Track the number of your emergency purchases

This KPI indicates the level of unplanned purchase which was required to continue
operation.
These orders are usually done when there are indication of product shortages and is
measured over a period of time, and expressed as a percentage between emergency
purchases and total purchases.
Emergency purchase percentage is the ratio of emergency purchase over the total number
of purchases in a certain period of time.

The example below expresses the quarterly average by project, which gives additional
details about emergencies occurred.
In essence, if this metric is lower, the organization has a chance to save costs, improve
planning processes, and reduce supply risks, among other important impacts.
These indications will, consequently, show how effective the planning is, and whether the
company needs to adjust future strategies.

=> Performance Indicator

The goal is to keep the ratio as low as possible in order to avoid bottlenecks and shortage
within your products portfolio.
By reducing emergency purchases organization can save cost and do better procurement
planning.

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