Do you know what the best strategies have in common, other than absolute success?
Some researches show that more than half of the companies consider themselves more successful just because they keep a closer look on performance indicators. And those companies are not wrong!
Basically, keeping a closer eye on performance indicators is the best way to determine the results of your strategy – which decisions were right, which were not, how much money was saved or lost in the process… It’s all about the data!
Within a company, every department has its own indicators, which display the quality and efficiency of the work. Which indicators are used to measure the performance of your department in your company?
Here, we like to use KPIs!
Key Performance Indicators (KPI’s) are a group of parameters used to evaluate the performance of different areas of an organization. This type of management emerged in the early 90s, and is now considered the best way to keep up with the most important metrics in each sector of any business.
KPIs are relevant not only because they allow measurement and performance evaluation in each department, but also and mainly because they make it easier for the manager to see where are the rights and wrongs, and which areas need more investment and attention.
The purchasing department is one of the most important in any business, be it large or small. This sector is responsible for mediating the company’s relationship with suppliers: from the choice of best supplier at the best price and quality required, to the control of performance standards, without an effective management the purchasing department is left disorganized and can be accountable for large losses – and even the bankruptcy of the company.
To measure up the performance of the purchasing department, KPIs cannot be forgotten! Let’s go through the 7 most essential KPIs to keep up with the purchasing department:
#1. Delivery: This KPI measures how well the purchasing department is when it comes to finding what the organization needs when it needs it.
How to measure: Number of on time deliveries / Total number of deliveries per supplier
Important: the company should not penalize a supplier for missing delivery dates if the lead time required by the supplier is not complied by the company or a change was requested at the purchase order. These two situations need to be taken into consideration when calculating this metric.
#2. Cycle time: It’s the average amount of time spent between the moment when the requisition from another department is submitted and the placement of the purchase order. In other words, the time the purchasing department takes to fulfill the needs of the organization.
How to measure: Moment of purchase order placement – Moment of requisition submission
This metric is usually measured in day and it excludes the supplier lead time.
#3. Supplier lead time: It’s the average amount of time spent from the moment of the order placement until the delivery.
How to measure: Moment of delivery – Moment of order
This metric is also measured in days and must be measured per supplier. It relates directly to the Delivery KPI.
#4. Quality: It’s important to keep track of the quality standards, which means knowing exactly if the goods purchased fulfill the needs of the company. If they do, great. If not, a change of supplier may be necessary.
How to measure: Amount of rejected items / Total amount of items ordered
This metric is usually calculated on a monthly basis.
If the percentage is too high, an analysis must be held to determine why the items are being rejected – if it’s due to problems with the supplier, with the purchasing orders or something else.
#5. Inventory risk: The obsolescence of goods is a real problem for companies that make large purchases. Over time, the entire inventory can become obsolete, and the money spent to buy and maintain them goes down the drain.
How to measure: Amount of money lost due to obsolescence / Total worth of the inventory
This metric is usually measured on a monthly basis, but could also be by trimester or semester.
#6. Employee Learning: This metric should be used more by all companies, big and small. Here, the purchasing manager must verify if the personnel are striving to deliver more quality and efficiency at work.
Keep tabs on the number of purchasing employees with certifications that improve their performance on the job. The certifications can be college degrees, participation in lectures, specializations, MBAs, etc. The more they search for knowledge and improvement, the better for the company.
This is a very good way to find out if the team feels motivated and driven, and also to reward the employees who show the biggest efforts of improvement. Finally, it’s an easy way to realize the need to provide training to the team.
#7 Cost: Here, we are looking at 3 metrics.
Number one is the Cost Avoidance, that helps the purchasing team find the lowest price for the same good among suppliers.
Here’s how you calculate it: Actual Purchasing Price – Lowest Price Quoted
Number two, Cost Saving. This indicator differs from the latter as it shows how much the department has been able to save when buying the same good, from the same supplier, for the second time, for a lower price. It demonstrates how well the department is at negotiating.
It can be calculated as:Actual Purchasing Price – Last Price Paid
Last, but not least, is the well-known ROI, Return Over Investment. It shows if investments were made wisely, if the return is positive. If it’s negative, it means that something went wrong in the process, and the company is losing money.
ROI = (Cost Saving + Cost Avoidance) / Cost of Purchasing Operation
These 7 are just examples of KPIs that you should follow in your company! By keeping up with these indicators, your purchasing team will be able to better understand the purchasing habits of the company, the performance of suppliers and if the procedures are working as they are supposed to. This way, it becomes easier to make changes in staff, reallocate investments, and, in short, assess the issues and find the appropriate solutions.
Do you analyze any different KPIs in your purchasing department? Leave them in the comments!
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