Procurement can involve a complex set of processes, making performance measurement a tall order. However, breaking the measurements down by the most important KPIs can qualify the specifics of your performance.
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 total cost savings into how well your procurement processes are working.
Sources and Savings
Cost savings is defined as the percent of the total cost saved on any procurement process, whether it is an order, a negotiated contract or technology investment. Cost savings is easily calculated by performing a basic equation based on the original price and the actual price paid.
The key is to look at the source of the cost savings to see if you can replicate these savings in other areas or increase it on the next order. Common sources of procurement cost savings are an improved deal with a supplier, improvements to process efficiencies or a combination of the two. The following factors contribute to the source of costs savings:
- Reduced capital
- Cost-increase avoidance
- Added value
- Simplified specifications
- Staff time saved
- Inventory management
- Implementation of mobile tools
- Cultural change
- Demand reduction
- Asset maximization
- Employee costs
- Invoice costs
Benefits – Budgetary vs. Non-budgetary
The implications of these different elements can affect procurement in both budgetary and non-budgetary ways. If an improved deal or more efficient process has positive monetary consequences, it means funds in the budget are freed to be allocated to other places. Non-budgetary benefits are less tangible, but still constructive as they bring advantages in human capital and better efficiencies, which can lead to financial improvement.
When determining your total cost savings and the ensuing benefits, always take a look at if they are going to affect your budget or other aspects of your company. Knowing this beforehand gives you a better idea of what to expect, how to maximize the advantages and what types of benefits you need above others.
Measuring performance of your procurement processes encompasses a variety of factors, including total cost savings and other forms of savings, such as time, effort and practices. As you measure your savings, you will begin to see prosperity grow and your company succeed.