The best way to measure the purchasing department’s performance
KPIs (Key Performance Indicators) are part of a type of process management that emerged in the 1990s and is one of the best ways to monitor the performance and evolution of any sector.
In the procurement area, the most important and most used metric to measure the success of the department is the savings on purchased supplies. This cost reduction is usually measured by directly comparing the prices charged in a previous period with the new prices for the same material.
Various practices can be adopted to reduce costs: simplifying supplier lifecycle management, increasing efficiency by leveraging the analysis of supply chain metrics, negotiating medium to long-term contracts or guiding staff on how to save costs effectively.
However, there are a number of metrics that can be used to find out how the team is contributing to the evolution of the business. Monitoring these indicators helps answer questions such as:
- What needs to be optimized?
- How do we compare to other organizations?
- Are we achieving results?
- Are we evolving?
Salim Khalife, founder, president and CEO of Paramount WorkPlace, recommends some monitoring approaches, such as: Lead time, supplier performance, cycle time, expenses under management, cost savings and percentage of POs, as already discussed in our blog.
In this article, we list some other indicators that will take the measurement of your purchasing area to a more advanced and strategic level. Check it out!
One of the most important purchasing KPIs is the acquisition ROI. It determines the profitability of the department’s investments and in order to calculate it you need to divide the annual cost savings by the annual internal acquisition cost and express it as a proportion.
The ROI of the purchasing area should have a significant return, and setting it 10 times higher than the internal investments for the department is a good goal.
Keep in mind that this KPI is different from the ROI calculated with the formula ROI = Net Income / Cost of Investment.
The emergency purchase fee is a KPI focused on unplanned orders. These orders are usually placed when there is a shortage of products in stock and the purchase and replacement of a particular part must be immediate.
This indicator has a time factor, that is, it is measured over a certain period and is expressed as a percentage between emergency purchases and total purchases. The objective is to keep the index as low as possible, avoiding supply chain bottlenecks, shortages in the product portfolio and extra expenses such as faster freight, for example.
This indicator will show how effective the planning of the sector is and whether it is necessary to adjust future strategies. Proper planning is essential to reduce costs and improve the quality of the sector’s purchases, directly impacting the organization’s profit.
To improve the performance of your department and solve your main problems, we recommend this article.
The quality of suppliers can be measured through several parameters, such as: analysis of reliability, deadlines and delivery quality, response time, quality of products supplied, price competitiveness, number of pending or overdue orders, quality of the relationship, among others. These criteria should be defined according to your department’s priorities and goals.
The control of the performance standards of its partners reflects not only in the optimization of the department’s processes, but also in the production, avoiding delays, waste and stopped machinery.
The average quality of services provided by suppliers can be improved through new criteria for choosing new suppliers or through renegotiation with existing ones.
Another tip is to do a SWOT analysis of each supplier before signing the contract in order to prevent possible risks related to the agreement, as explained in this article.
A popular method of assessing purchase effectiveness is to review inventory turnover rates. The index measures the number of times, on average, that the stock is used or rotated during a given period.
Measurement in this case can bring improvements related to:
- Dead stock reduction
- Savings on storage costs
- Decrease in emergency or unforeseen purchases
This indicator helps in stock management, but it is essential to pay attention to seasonal purchases that can make this measure inaccurate. One solution would be to have a separate effectiveness indicator for seasonal purchases.
Transport costs are a significant part of general logistics costs, but are often negotiated and defined by the buyer. Therefore, being able to lower freight prices when negotiating the purchase helps to reduce the total costs of the purchasing department, increasing its effectiveness.
Part of this negotiation consists of choosing the Incoterm included in the purchase order. Some companies have standard Incoterms used in most orders, but a careful assessment of the possibilities can help you save money.
Always try to make more cargo consolidations, buying more materials from the same supplier or from the same location in a short time, thus, only one shipment will be made and the total transportation costs will be reduced.
In this process, never fail to compare the freight values offered by the supplier to the freight price chart provided by your company’s logistics, opting for the most affordable.
Automation is necessary for better measurement
In addition to defining indicators to assess the development of activities in the area and identifying bottlenecks in processes, these data must be correct and always available for monitoring. The best way to do this is by automating the supply chain.
Automation not only improves data management, but it also reduces costs and prevents frauds, minimizing the risks of operations and subsequent frustrations. Use tools to optimize each step and collect, analyze and monitor data from the entire process.
To better interpret the information generated through data, we suggest using a Business Intelligence software to centralize all the information that needs to be analyzed and used in decision-making. In this manner, possible flaws in the department’s processes and improvements can be identified with greater precision and ease.
Developing an effective measurement for the purchasing team is not always an easy task. It depends on analyzes of the department’s operation and definition of the main priorities, goals and objectives.
After identifying the real needs of the business and understanding the nature of the key purchasing performance indicators, it is easy to choose those that are in line with the defined objectives.
Monitoring the indicators and KPIs with your team will enable them to better understand the company’s buying habits, the performance of suppliers and whether the procedures are working as they should. Thus, it becomes easier to make eventual personnel changes, reallocate resources, mitigate risks and avoid bottlenecks, in short: assess problems, find solutions and optimize the department.
To better understand how Soluparts can contribute to your company’s purchasing department, contact our team!