Improve Your Purchasing with These Procurement KPIs & Metrics

For procurement leaders, the impacts of their team's actions are clear: reduced risk, lower costs, enhanced profitability, and greater operational efficiency.

Like all departments, however, these benefits must be quantified and measured. We use procurement KPIs for this.

Purchasing KPIs help purchasing teams track and measure performance, identify areas for improvement, and monitor growth and progress toward crucial procurement goals.

Discover the 13 most important procurement KPIs to measure team success and spot opportunities to continuously improve your procurement team’s performance.

What are procurement KPIs?

KPI stands for key performance indicator, which are metrics used to measure performance in a given business context.

Procurement key performance indicators, then, are metrics used to measure success and progress in the context of sourcing and purchasing.

Procurement teams use KPIs to set a standard and a benchmark for achievement. These measurements are reviewed monthly or quarterly and compared to the results of previous periods.

The goal is to improve performance against important KPIs each period or at least remain stable (depending on current performance).

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How do you set KPIs in procurement?

Follow these basic steps to set KPIs:

1. Identify business objectives

What are the primary goals of the company right now?

For example, one of your business goals might be to increase profitability ahead of a new funding round.

2. Translate business objectives into procurement goals

Here, you’re answering the question: What defines success for your procurement team?

Use the business goals established above to determine this. For instance, if increasing profitability is a key business goal, the purchasing department can aid progress by decreasing operating costs.

3. Choose quantifiable metrics

Next, determine the measurable aspects of performance that ladder up into those goals.

In this case, some metrics relevant to cutting costs include:

• Spend under management
• Procurement cost reduction
• Number of suppliers
• Supplier availability

4. Create a measurement process

Decide how you’ll measure performance and set up a system for tracking.

For example, you might set up a custom dashboard in your procurement management platform to monitor real-time progress.

5. Establish a review cadence

Determine how often you’ll review performance against KPIs.

Though your procurement software tool shows you progress in real time, it's wise to agree to meet as a team regularly to review the impact of strategies you put in place and brainstorm new improvement opportunities. Monthly or quarterly meetings are generally appropriate.

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13 important procurement KPIs and metrics

Below we walk through the most valuable KPIs and metrics that procurement teams should track to measure success and improve.

1. Supplier compliance rate

Supplier compliance rate is the rate at which your vendors meet the obligations set out in your contract.

As such, a well-designed contract — and subsequent contract management process — is a critical first step here.

You may find it helpful to measure supplier compliance rate in the inverse. That is, the number of times suppliers are not compliant with certain contractual obligations, such as:

• Discrepancies between agreed and actual pricing
• Safety regulations
• Software uptime requirements
• Agreements regarding the speed of customer support resolutions

The compliance rate formula is as follows:
Compliance Rate = [(Total – Non-compliances) / (Total)] x 100%

2. Supplier defect rate

Supplier defect rate is the percentage of items that are delivered defective, broken, or otherwise not up to standard.

In software procurement, two factors impact this KPI:

1. Software downtime (measured as a percentage)
2. Bugs and technical issues (not due to user error)

The defect rate is as follows:

defect rate = (defects / output tested) x 100

3. Procurement cost reduction

Procurement cost reduction is the amount of money your purchasing team saves by implementing cost-cutting strategies such as software license consolidation.

Measure procurement cost reduction as either the total dollar amount saved during a given period or as a percentage of total spending.

Learn more about cost avoidance and reduction as part of a procurement strategy in our guide: How to practice cost avoidance when buying software.

4. Process compliance rate

Process compliance rate is a measure of internal compliance with the purchasing policies you have in place.

It's a great way to measure how your team adheres to your procurement processes, especially if purchasing is decentralized and isn’t under the direct management of a procurement leader.

The process compliance rate is the percentage of new procurement undertakings that follow your buying policies precisely.

5. Number of suppliers

Procurement teams need to find the sweet spot between too many and too few suppliers.

More vendors mean increased risk and require more effort on the supplier management front.

On the other hand, having too few suppliers puts you at risk of supply chain issues and shortages. Procurement costs could dramatically increase if you need to source a new vendor in an emergency.

A good rule of thumb is to have at least two vendors for each purchasing category—a primary supplier you use regularly and a secondary pre-vetted vendor as a backup.

6. Purchase order coverage

Purchase order coverage measures the percentage of vendor invoices that accurately match existing purchase order numbers.

Ideally, this number should be at or close to 100 percent to prevent unauthorized spending and high processing costs.

7. Procurement ROI

This KPI measures the total return on procurement investment.

To calculate it, you must first understand the total annual costs saved by procurement. Then, divide your annual cost savings by the annual procurement cost (wages, procurement software, etc.) to determine your ROI.

Here is the formula:

‍( Total Benefits - Total Cost of Investments ) / Total Cost of Investments x 100

8. Maverick spend

Maverick spend is spending that doesn’t fall within your company’s procurement policies and procedures.

This kind of spending is essential to monitor regarding SaaS purchasing. It’s common for department leaders to make small purchases that, as user count increases, end up being huge annual bills.

Maverick spending is a percentage of total spending, and it’s generally desirable to keep this as low as possible.

Learn more about maverick spending and how to reduce it in our guide: What is maverick spend, and 5 ways to avoid it.

9. Spend under management

Spending under management (SUM) is the inverse of maverick spend, measured as a dollar amount.

SUM is the total amount spent on procurement minus maverick spend. Your procurement department should aim to get the spend under management metric as high as possible.

10. Price competitiveness

Price competitiveness measures the price you pay for goods and services compared to the list price and actual market pricing as identified by the price benchmarking features in your procurement platform.

11. Purchase order cycle time

Purchase order cycle time is the amount of time (measured in days or hours) that passes between creating a purchase request form and sending it to the vendor.

It measures the speed at which your approval workflows operate, with faster PO cycle times being better.

12. Emergency purchase ratio

Emergency purchase ratio is the percentage of spending (measured as dollars or the number of purchase orders) that occurs under an emergency scenario.

One example is when one of your regular suppliers cannot fulfill a purchase order, and you need to quickly pivot to an alternate service provider to meet that need.

Emergency purchases are generally more expensive, especially when you factor in the additional work required of the procurement team to rectify the issue.

They also mean you take on additional risk, as it's often the case that these secondary vendors are new and therefore vetted and assessed in an emergency context — part of why the number of suppliers procurement metric is so important.

With all of this in mind, keeping your emergency purchase ratio as low as possible is a good goal.

13. Supplier availability

Vendor availability measures supplier performance from the perspective of responsiveness to emergency order demands.

It answers, “How capable is this supplier of fulfilling our growing demands?” and speaks to the vendor’s reliability.

Supplier availability is the ratio of available items (or hours if you’re dealing with a service provider) to the number of orders placed.

For instance, if you purchase 1000 units of an item and then have 5000 available at any one time, you have an availability ratio of 5:1.

In software buying, supplier availability refers to the vendor’s ability to scale usage. For instance, can your email automation provider instantly move from 10,000 to 100,000 emails sent monthly?

Achieve your procurement goals with Vendr

Many of the procurement KPIs discussed above focus on cost management. They aim to create hard savings that reduce the total cost of procurement and create a more profitable company.

For modern companies that rely heavily on software tools for daily operations, finding opportunities to cut software spending is a top priority.

Vendr is the SaaS buying platform that secures cost-effective software purchases and removes the hassle from procurement stakeholders.

Vendr helps you:

• Implement and optimize supplier performance management practices to manage supply risks
• Track the impact of your cost management initiatives on the bottom line
• Streamline the entire procurement lifecycle with automated approval workflows

How much could you save on SaaS expenditure each year? Find out today with our free savings analysis.

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Procurement KPIs FAQs

What are some benefits of tracking procurement KPIs?

Tracking procurement KPIs can have multiple benefits including helping identify cost-saving opportunities, improving supplier relationships by ensuring on-time delivery and high-quality products, and  optimizing forecasting. Tracking KPIs also increases return on investment (ROI) by measuring the effectiveness of procurement initiatives and achieving higher ROI and more soft savings.

Why is it important to review procurement KPIs regularly?

Regularly reviewing procurement KPIs is crucial for continuous improvement and effective procurement management. It allows procurement professionals to assess the impact of implemented strategies and identify new improvement opportunities. Regular reviews help companies maintaing alignment with business objectives and adapt to any changes in the procurement landscape. 

By consistently monitoring KPIs, procurement teams can ensure that they are meeting their goals, optimizing processes, and achieving desired outcomes in terms of cost savings, supplier performance, and overall procurement efficiency.

What is supplier lead time?

Supplier lead time is the duration between when a supplier receives your order and when they ship it. This key metric, typically measured in days, starts when the supplier confirms availability and processes the order, ending with the delivery of goods.

Supplier lead time = Delivery time - Order time