Procurement: ROI is the Best KPI
All about Procurement ROI and KPIs
Measuring your Procurement Platform…
The many factors involved in obtaining goods and services often revolve around money, efficiencies and timing. Measuring the performance and success of these processes might seem overwhelming if examined in whole.
To simplify this, break it down into manageable metrics.
There are several KPIs essential to procurement, but the unofficial top five—total cost savings, cycle time and delivery, spend, ROI and compliance—should be examined above all other assessments. Here, we take a look at how to measure, consider and factor return on investment (ROI) into how well your processes are working.
The ROI of any business investment is calculated with the same general equation. ROI = (Gain from investment – Cost of investment) / Cost of investment. For example, if you invested $1,000 in a technology, could calculate that you made $1,200 by using it, your ROI is 20%.
This simple, but effective equation is important to many business functions, even ones with less definitive monetary value. Being able to justify an investment is well worth the money has long been a powerful tool in helping businesses grow, adopt new technologies and become more efficient.
However universal ROI is for other business operations and investments, it has a slightly different definition in the procurement industry. When calculating the ROI of procurement, you are determining the actual worth of the procurement department within the greater context of a company.
This KPI is essentially the measurement of the department’s cost effectiveness. Procurement ROI is the annual cost savings divided by the annual cost of procurement. There are also elements like influenced spend and yields to be considered. For example, if procurement saved $1 million and cost a total of $4 million, the annual ROI is 25%.
Arriving at an ROI of a procurement department is valuable for seeing the numeric returns and a measurable justification of investing in a team to procure the company’s materials. It is also a good way to examine procurement budgets, spend and numbers in terms of business strategy.
As useful as procurement ROI is for measuring performance, it is only a portion. When combined with the other KPIs and seen as a piece of the whole picture, it becomes clear if performance is successful or has room for improvement.
Ensure to take procurement ROI only for what it is on the surface, and factor in the other important KPIs of performance measurement to get a true sense of how well your procurement processes are succeeding.