Procurement teams have never had better visibility into supplier relationships or deeper access to spend at a granular level. Thanks to hardworking data analysts everywhere, we have more data-driven insights than ever before. With all this, you’d think Procurement would excel at building and hitting organizational goals – yet we aren’t seeing this happen. Where’s the disconnect?
If you don’t have an answer, you aren’t alone. Plenty of business leaders wonder why their companies miss established goals or why critical objectives fail to deliver even when those goals are hit. The root of these problems is often a foundational misunderstanding about metrics, KPIs, and how to use them to track performance.
Metrics vs KPIs
First, we need to differentiate metrics and KPIs. While they’re often used interchangeably, these two terms are distinct in how they should be used. We know a KPI is a measurement against a business objective, but how does this differ from a metric? Why is the difference important?
- Metrics are, to be blunt, dumb numbers. They are the simple quantification of a specific set of activities, devoid of any external context or nuance. Metrics are everywhere – anything you can tie to a measurement can be a metric, whether an evaluation is valuable or not.
- Key performance indicators are context-dependent. When we earmark something as a KPI, we’re applying the context of specific business objectives. KPIs are just as objective as any other metric, yet they allow us to draw inferences that speak to the greater whole of our organization through the lens of a specific goal.
The difference between the two is intent, and comes down to the “key” in “key performance indicator.” Any organization can track many thousands of metrics, but effectively tracking against specific goals required narrow, thoughtful focus.
Valuable KPIs for Procurement
The number of suppliers we work with is a simple example of a metric. We can track the rise and fall of our supplier relationships over time; perhaps we’ve decreased our supplier count over the last 12 months – what does this tell us? By itself, nothing. There is no “good” or “bad” number of supplier relationships, because we need a contextual lens to view this metric through. For example:
- If our goal is cost reduction, this decrease could be good. Supplier consolidation provides negotiation leverage when going out to market and streamlines administrative processes.
- If our goal is risk reduction, this decrease could be bad. Supply chain disruption is most damaging when organizations rely on a sole source for mission critical materials or logistics partners to get them where they need to go.
Looking at supplier count as a metric alone doesn’t help us understand how well we’re doing for either goal. So, what will? Tracking spend under management and supplier availability are two viable options. Dozens of other metrics could serve as KPIs here, too. Which we choose to track ultimately depends on our organizational strengths, weaknesses, and objectives.
Meaningful KPIs (and a Couple Duds)
So, which KPIs are meaningful to Procurement? See below for a non-exhaustive list of a few I propose every Procurement organization should be tracking.
If our goal is to drive company efficiencies then we as a team must also be efficient. “Cost savings” may appear to be a valuable KPI, but I consider it a simple vanity metric. Why? Because cost savings only speaks to our end game – none of the activity leading to it, and certainly none of the other opportunities left on the table when pursuing it. Instead, we should focus on:
- Procurement ROI: Beyond savings achieved (cost reduction or cost avoidance), what is the internal cost of maintaining Procurement initiatives?
- Spend Under Management: How many supplier relationships does Procurement touch directly and actively? How does this track between direct and indirect spend? Between spend categories?
Negotiating a great deal doesn’t count for much if suppliers don’t abide by it after execution. The percentage of suppliers under contract is another vanity metric and Procurement should establish KPIs that track suppliers against commitments:
- LPP vs. Contract Price: Do invoices match stated pricing in your agreements? What percentage of spend deviates from contract pricing?
- Average Delivery/Lead Time: How many supplier deliveries are on-time according to SLAs? What is the average number of days late among worst offenders?
Policy & Process Adherence
Don’t just keep an eye on suppliers. Make sure internal purchase habits follow SOP as well.
- On- vs. Off-Contract Purchases: How much spend goes to rogue, off-contract purchases that could be driven to on-contract items? What is the cost differential between these off- and on-contract buys?
- Purchase/PO Cycle Time: How much time elapses between a purchase request and a PO? Until the PO is issued to a supplier?
Avoid Reading Tea Leaves
When we lose sight of KPIs and pour over every metric that looks even remotely important, we stop actively tracking against our goals. At that point, we might as well resort to reading tea leaves when building forecasts. In the end, the number of KPIs we track compared to all of the metrics available to us serves as a KPI on its own (call it the “red herring ratio”).
Consider your high-level goals for the next 12 months and think about all the metrics you collect each day:
- How many actually measure progress?
- How many are vanity measurements that say little (but look good)?
- How many are actually unrelated to your goals?
Author: Tom Rogers
Job Title: CEO
Organization: Vendor Centric