Purchase performance and KPIs: Key points to remember
Company purchases represent around 50% of its turnover. KPIs are essential indicators for evaluating the performance of the procurement function. They enable management and teams to measure the achievement of objectives over a specified period. KPIs no longer focus solely on "traditional" criteria such as cost, lead time and quality but also on other aspects such as CSR, internal customer satisfaction, buyer performance and supplier relations. Mooncard explains how to evaluate your purchase performance.
Why set up purchase performance KPIs?
KPIs are essential tools for managing a company's purchasing policy. They provide a real-time overview of the purchasing department's various activities. They reflect the day-to-day work undertaken by different teams. Defining your key indicators means purchasing functions can:
- Analyse the management and organisation of the procurement process;
- Inform company employees, management and external partners on the performance of the action plan in place;
- Provide accurate information on current statuses and what remains to be done;
- Help make more relevant decisions based on numerical data;
- Accurately measure the achievement of strategic objectives;
- Highlight areas for improvement.
How do you apply the SMART method when choosing KPIs?
To effectively assess your purchase performance, the quantitative and qualitative indicators chosen should be SMART:
Specific. Start by clearly defining your desired objectives. Then deduce the required performance indicators. They should be consistent with the company's strategy.
Measurable. The objectives you intend to pursue must be objectively measurable. They must include sufficient true data available over time. The information must be collected and organised for it to be exploited.
Achievable. Your KPIs must allow for the optimisation of purchases. You should be able to compare them to understand the obtained results.
Realistic. The indicators defined must be attainable with the human, financial and material resources available to the company.
Time-bound. To accurately assess progress it is vital to compare key performance indicators over the same time periods.
Which KPIs should be used to measure the performance of a purchasing department?
Choose the best indicators to include in your dashboard or reporting tool.
The purchasing function ROI
Purchasing function ROI is ideal for evaluating teams' productivity. It means you can observe the relationship between:
- Costs and fees avoided (products, services) associated with the purchasing department;
- Its overall operational costs;
- The share of company purchases processed by the purchasing department.
Not all company purchases will be under the control of a purchasing department. Class C purchases AKA "wild purchases" are the perfect example as they make purchasing rationalisation more complex.
This indicator measures the share of purchases actually managed by buyers. It assesses their productivity based on their actual contribution, not hypothetical data.
Linear Performance Pricing (LPP)
The percentage of suppliers under contract is not enough if you want to evaluate the application of various agreements. The cost/value correlation or Linear Performance Pricing (LPP) provides insight into the actual implementation of contracts. It evaluates:
- Compliance with contracts, based on the number of lines (in the management software) invoiced outside the reference prices;
- The share of overruns noted in the total costs.
Non-contractual purchase rate
This gives a precise indication of the adherence of business lines to the company's purchasing strategy. It verifies that buyers are complying with the procedures for managing supply contracts. This indicator follows two variables:
- The part of the costs incurred outside the contract when a contract has been concluded;
- The price difference or cost represented by this type of expenditure.
- Duration of the purchase process
Keeping close tabs on the duration of the order process will allow you to find ways to speed up the processing of purchases. This indicator precisely indicates the steps where deadlines are not being met. It can highlight a need for training of buyers regarding:
- Drafting of requests;
- Validation of requests;
- Production and transmission of purchase orders.
Internal customer satisfaction
Internal customer satisfaction is a priority for the purchasing function. Purchases made by the company, in particular indirect purchases impact all of a company's business lines. They contribute to employee well-being, quality of work life (QWL), safety and performance.
To assess employee satisfaction, the purchasing department may, for example, monitor:
- The number of projects where purchasing teams have to deal with upstream expenses;
- The number of requests received from business divisions.
The percentage of suppliers with an adequate corporate social responsibility (CSR) approach
Is your company committed to a responsible purchasing strategy? Determining the share of your suppliers who adhere to a CSR approach will allow you to reduce environmental, human, economic and social risks.