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Measuring Purchasing performance is essential for effective management and continued improvement
of the purchasing function. Purchasing evaluation provides vital feedback to the purchasing department
as well as top managements for assessing the effectiveness of an organization’s purchasing strategies
and decision-making processes. Overall performance of an organization is strongly affected by how well
the purchasing function can contribute to the firm’s strategies and goals.

Purchasing plays an ever increasingly important role in the supply chain especially in an economic
downturn. Cost reduction of raw material and services can allow companies to competitively market the
price of their finished goods to win in a business. An obvious performance measure of the success of any
purchasing department is the amount of money saved by the company.

A better understanding of how purchasing professionals and internal customers evaluate purchasing
performance is needed to improve the overall effectiveness and efficiency of the organization.

Purchasing Departments are tasked in sourcing goods or services at the best possible price with the
Right Quality the Quantity the Right Delivery. The possibilities of procuring cheaper materials with
quality desired from alternative sources as part of their daily activities.

Evaluating Purchasing Performance

An organization would need a systematic approach if they want to efficiently evaluate the purchasing
performance which may lead to the following benefits:

1. Better Decision Making – From identified variances of planned results and actions can be taken in the
future to prevent further occurrences.

2. Better Communication – Such as analyzing certain invoices which would need an extra check that
would lead to better payment arrangement procedures and improve understanding between purchasing
and administration.
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3. Better Visual – It makes things more visible with regular reporting against actual vs Planned this
enables a buyer to verify whether their expectations have been realized.

4. Better Motivation – An evaluation system can meet the personal and motivational needs of each
purchaser which can be used as constructive goal setting and developing personal programs in
purchasing.

There are several performance measurements that businesses can use when they measure purchasing
performance:

Purchasing Efficiency – Administrative costs are the basis for measuring purchase efficiency, this
performance measurement does not relate to the amount purchased items that the department has
procured but the measurement relates to how well the purchasing department is performing in the
activities they are expected to perform against the budget that has been placed. If the purchasing costs
are within budget, then the efficiency of the purchasing department has met its expectations. If the
department is using funds over and above the budget then the purchasing function is not efficient.

Purchasing Effectiveness – Price that is paid for an item will not be necessarily a good measurement of
performance. Prices may fluctuate due to market conditions, availability and other demand pressures in
such situations purchasing departments may not be able to control the price A popular method of
assessing purchasing effectiveness is to review the inventory turnover ratios. The ratio measures the
number of times, on average that the inventory is used, or turned, during the period.

Purchasing KPI Management Tool

Purchase Management determine which activities are key areas and justify the effort of evaluation. Key
Performance Indicators (or KPIs) are management tools designed to analyze procurement department
performances to achieve goals, strategies and objectives. They are also crucial to ensure that
procurement is sustainable and that purchasers are constantly looking for ways on how to improve
procurement processes.
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KPIs help to point in the direction where it improves performance levels. Improvement for more
efficient and sustainable procurement processes. The three major groups of Purchasing KPI are Cost
Savings, Quality, and Delivery of purchased items.

Cost Savings KPI’s

Measuring the percentage of managed spend against total spend on purchases for external products
and services. Managed spend can be calculated as the sum of all spend run by an organization. Goal of
this KPI is to have more spend standard procedures, thereby saving on costs. And Reducing
Consumption to determine if it’s necessary, an organization can exclude things that they can they can do
without or substitute, for example the reduction of travel expenses by deployment of video
conferencing. Consolidation of spend hidden costs can arise if specifications are harmonized such as
Mobile Phones laptops and lease cars which could lead to savings. From suppliers, Improving
competition among suppliers for cost saving, generating higher competition among suppliers, By using
benchmarking and comparing supplier participation rate results.

Quality KPI’s
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Products and services of low quality would affect an organizations product quality which might add
additional costs. KPI quantifies the purchase quality of the procurement branch. Metrics such as
percentage of rejections, goal is to lower these percentages, rejected services from service providers,
lowering the disapproval rate. Seller rejection rate rejected goods which is important if it directly affects
customers. Disruptions due to low quality, if the company is facing continuity disruptions due to low
quality focus on increasing the quality of strategic materials. Setting a lower end quality standard for
each article and the goal is to follow the quality standards.

Delivery KPI’s

To establish strategies that can improve delivery as well as continuity of supply. Strategic supply is
important for organizations, late deliveries might affect supply chain continuity, early deliveries can
result in higher operational/Inventory costs. The goal is to have lower number of errors against the
requested time frame for deliveries. Deliveries that are on time helps to Maintain continuity, improve
inventory management which leads to cost savings. The Accuracy of purchase orders is the outcome of
suppliers delivering the right quantity of right goods. Inaccurate purchase orders might result in
additional inventory or operational costs and shortage in quantity can interrupt continuity.

Factors Influencing Purchasing performance

Factors that influences purchasing performance measurement. It’s how an organizations management
looks at the role and importance of function. Management evaluates purchasing operations on
parameters such as

Operational and administrative activity: Management evaluates purchasing operations primarily on

parameters such as order backlog, administrative lead-time, number of orders issued, numbers of
requests for quotations issued, adherence to existing procedures, etc.
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Commercial activity: Management is aware of the savings potential which purchasing may represent.
Parameters being used here are the total savings reported by purchasing, number of quotations issued,
variance reports, inflation reports, etc.

Part of integrated Logistics: Management becomes aware that price hunting has its drawbacks and may
lead to sub-optimization. Evaluation is aimed at quality improvement, lead time reduction and
improving supplier delivery reliability.

Strategic business area: Purchasing is actively involved in deciding the company’s core business and
reinforces the company’s competitive position. Management evaluates purchasing amongst others on
the number of changes in its supply base, number of tenders and e-auctions, and its contribution to the
bottom line in terms of savings realized.

Establishing KPI

An organization should figure out what stakeholder’s interest is and along with the company’s strategies
and future objectives. KPI’s are usually customized, looking for metrics that reveal progress towards
achieving goals.

Analysis of the data: management should look for interrelationships between means and ends.
Following the analytical stage, various measures are developed, implemented and subsequently refined.
Prevent measures becoming too complex and too numerous, as simplicity is key.

KPIs should be relevant to your business or department and simple to use. Key Indicators of five or six
would be enough, and not being overwhelmed by data it should not be about taking hours gathering
data.

Conclusion

There is no one-size-fits-all formula for every company. Goals as well as KPIs are most usually custom.
Several studies have been carried out on purchasing performance and the results are that there is no
one method that will cover every purchasing department. However common key area measures that is
found to be common in evaluating performance. Namely, cost saving, vendor quality, delivery metrics
and price effectiveness. Although these key measures are common, the weight placed on these
measures are by no means uniform and will vary between industries, businesses and services. In
addition, the importance of these measures to the overall effectiveness of a purchasing department will
change over time and therefore need to be assessed and modified periodically.

References:

A. J. Van Weele. (1994). “Purchasing Management analysis, planning and practice”. London International
Thomson Business Press.
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Kenneth Hamlett. (2010). “What Are the Key Performance Indicators for a Purchasing Department”.
Retrieved from http://smallbusiness.chron.com/key-performance-indicators-purchasing-department-
1066.html, accessed 1/12/2017.

Lee Shui Cha Sylvia, MSIPMM. (2017). “Key Success Factors for an Effective Procurement or Purchasing
Process”. Retrieved from https://sipmm.edu.sg/key-success-factors-for-an-effective-procurement-or-
purchasing-process, accessed 28/11/2017.

Martin Murray. (2017). “Measuring Purchasing Performance- Optimized Supply Chain Impact”. Retrieved
from https://www.thebalance.com/measuring-purchasing-performance-2221229, accessed 28/11/2017.

Martin Putters. (2013). “How To Measure Procurement Savings”. Retrieved from

https://www.capgemini.com/consulting/2013/09/how-to-measure-procurement-savings, accessed
30/11/2017.

Mork Choo, MSIPMM. (2017). “Effective Procurement Practices in the Marine Offshore & Shipbuilding
Industry”. Retrieved from https://sipmm.edu.sg/effective-procurement-practices-in-the-marine-
offshore-shipbuilding-industry, accessed 28/11/2017

TOP 10 PROCUREMENT KPIS

Procurement Key Performance Indicators and Metrics

✔ See different templates & designs ✔ Find & track the right procurement KPIs to meet your
corporate objectives

A procurement KPI or metric is a measurable value that tracks all relevant aspects of obtaining or
buying goods and services. These KPIs enable the procurement department to control and optimize the
quantity, quality, costs, timing and sourcing of purchasing processes.

Here is the complete list of the most important procurement KPIs and metrics, that we will discuss in
this article in every detail:

Compliance Rate: Understand if suppliers fulfill your requirements

Number of Suppliers: Track your level of dependency towards your suppliers

Purchase Order Cycle Time: Know who to address your urgent orders to

Supplier Availability: Measure suppliers’ capacity to respond to demand

Supplier Defect Rate: Evaluate your suppliers’ individual quality

Lead Time: Understand the total time to fulfill an order

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Cost of Purchase Order: Control the internal costs incurred by each purchase

Procurement Cost Reduction: Streamline the tangible costs savings

Procurement Cost Avoidance: Avoid potential extra costs in the future

Procurement ROI: Determine the profitability of investments

Compliance Rate

Do suppliers fulfill your requirements?

Compliance in procurement represents the whole of basic agreements a company and a supplier lay
down. It results in various requirements such as the maximum reaction time in case of any issue, the
delivery time, special discount offers, etc. It is a key component in providing guidance and insights into
processes, and participates in saving costs through better negotiations with suppliers. On our
procurement KPI example aside, the compliance rate is of 68% overall, and it is broken down per type of
suppliers: the highest compliance rate is with software suppliers, with 75%, while the lowest is with
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Digital Services with 9% of compliance. Is also tracked the general evolution over five years, with a pre-
set target of 60% that is reached in 2016 and 2017.

Performance Indicators

For an average company that is not a multinational operating world-wide with millions of suppliers or
end-users, reaching an overall of 50% of compliance is a good target to set.

Relevant Showcase Dashboard

 Procurement KPI Dashboard

Number of Suppliers

Monitor your level of dependency towards your suppliers over time

Our second procurement KPI tracks the evolution of how many suppliers the company has. Relying on
too few suppliers and not diversifying your sources creates a high risk of dependency, and potential
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further problems if one of them pulls out at the last moment. On the other hand, too many suppliers
reduce the possibilities of interesting discounts. The procurement KPI aside shows the evolution of the
number suppliers over the years, divided into two categories: contracted suppliers and unlisted ones.
Often enough, companies prefer contracting suppliers so that they agree with their terms of compliance
– but not all suppliers agree, so they are unlisted. The contracted partners can be classified as gold,
silver or bronze according to certain criteria measuring the relationship through discount, reliability, etc.

Performance Indicators

Apart from the level of dependency, the optimal number of suppliers you need should be measured
using other metrics like the quantity discount they provide you with, and the defect rate of their
supplies.

Relevant Showcase Dashboard

 Procurement KPI Dashboard

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Purchase Order Cycle Time

Know who to address your urgent orders to

The Purchase Order Cycle Time is a procurement KPI that covers the end-to-end ordering process, from
the moment a purchase order is created to the order approval, receipt, invoice and finally payment of
the order. It focuses on the order and does not include the creation and delivery of the product or
material itself. On our illustration aside, we see that the cycle decreased to 3,9 days at its minimal in
March 2017, before increasing up to 6,3 days in June. The suppliers are divided into three categories
classifying their purchase cycle time: short (4 days or less), medium (5 to 8 days) or long (over 8 days).
This is a factor to take into account when purchasing: if the order is urgent, you may need to know
which supplier is able to handle it quickly.

Performance Indicators

Reducing your cycle time can improve the turnaround of other key activities, and improve staff
productivity and the overall cost of the procurement function.

Relevant Showcase Dashboard

 Procurement KPI Dashboard

VISUALIZE AND TRACK YOUR PROCUREMENT KPIS WITH A FEW CLICKS

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Supplier Availability

Measure your suppliers’ capacity to respond to urgent demand

The supplier availability is a procurement KPI that refers to the number of times goods were available on
the supplier’s side, or to the number of orders placed with the supplier. In an era of fast-changing
consumer habits, where the lines between different channels are blurred, and where mobile-commerce,
online purchases, in-store consumer-specific marketing all merge in one retail experience, it is important
to manage suppliers as efficiently as possible to guarantee availability of stocks. By monitoring the
evolution of your supplier’s availability of stocks, you know the degree of reliability you can place in
them.

Performance Indicators

Maintaining your supplier’s availability over 90% ensures a good functioning of your supply chain and a
greater level of efficiency.
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Relevant Showcase Dashboard

 Supplier Delivery Dashboard

Supplier Defect Rate

Evaluate your suppliers’ individual quality

This is a procurement KPI that is crucial when it comes to determining the final quality of a product. It
measures the percentage of products received from suppliers that do not meet the compliance
specifications and quality requirements. The Supplier Defect Rate is more critical in some industries that
have high-risks and multi-tiered supplier bases like the aerospace and defense or the automotive.
Tracking your different suppliers’ defect rates and break it down into defect type will provide you
insights on which supplier is more performant and reliable than other, and what type of errors are done.
On our example aside, it is obvious that the first supplier is more reliable than any of the five others:
within the 1% of defective goods supplier 1 has, 80% of them still have no impact.
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Performance Indicators

Measure and track the different defect rates amongst your suppliers and identify the ones that are
performing best and that are the most reliable.

Relevant Showcase Dashboard

 Supplier Delivery Dashboard

see rich examples of interactive real-time kpis in datapine

Lead Time

Measure the total time to fulfill an order

Our next procurement KPI measures the interval of time between the initiation of a procurement action,
and the receipt of the production model into the supply system, purchased as a result of such action. In
other words, it is the latency between the initiation and the execution of a process. It is composed of
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production lead time and administrative lead time. For instance, the lead time between the placement
of an order and the delivery of printed circuit boards from a manufacturer can span from 2 weeks to 3
months, or sometimes more. Lead time is different from purchase order cycle time as it starts when the
request is made till the final delivery and testing, while cycle time ends at the confirmation of the order.
Set a target amount of days under which the lead time should stay; if you see that it repeatedly fails it
over time, measures should be taken.

Performance Indicators

The idea is to reduce lead time as much as you can while keeping a good quality level.

Relevant Showcase Dashboard

 Supplier Delivery Dashboard

Cost of Purchase Order

Control the internal costs incurred by each purchase

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The Cost of Purchase Order is one of the disputed procurement KPIs, as the definition and application
vary. In theory, this metric represents the average costs of processing an order, from purchase creation
to invoice closure. In practice, the costs to process internally the purchase order can include a staggering
list of variables, and depending on studies, can range from $1,34 to $437... So, when measuring this
metric, it comes down to what you decide to consider: what is the average cost to process a purchase
order, based on how long it takes to do so, by the staff directly or indirectly involved. On our example
aside, we have an average of (13,144/804) €16.34, which is within the studies’ range.

Performance Indicators

The idea is to improve the efficiency of the procure-to-pay cycle, so as to prevent errors and reduce
costs.

Relevant Showcase Dashboard

 Procurement Cost Management Dashboard

VISUALIZE AND TRACK YOUR PROCUREMENT KPIS WITH A FEW CLICKS

Become a data wizard in less than 1 hour!

Business Email

Password
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Procurement Cost Reduction

Streamline the tangible costs savings

Cost reduction is central amongst the procurement KPIs of our cost management dashboard. It wants to
measure the tangible “hard savings”, that you have performed in terms of cost management over the
years. You can easily measure them by comparing directly the old costs versus the new ones for the
same good or service. On our illustration aside, we see that it went from €260k up to €480k five years
later. It also breaks down the cost reduction by supplier category (switches, battery, display, etc.) and
we see that the transistors’ section has the highest savings. There are a lot of best practices to adopt to
reduce the costs: you can streamline your supplier lifecycle management, increase efficiency by
leveraging supply chain analytics, or train your staff on how to save costs. It is a key metric for top
management as it has direct influence on the income statement.

Performance Indicators

Monitor your costs reduction over time with the purpose to increase it in the long-term.
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Relevant Showcase Dashboard

 Procurement Cost Management Dashboard

Procurement Cost Avoidance

Avoid potential extra costs in the future

The second last of our procurement metrics focuses on the actions undertaken to reduce potential
future costs, like replacing parts before they fail, and inevitably damage other parts. It is sometimes
referred to as “soft savings” by opposition to the “hard” ones, since they do not directly appear on the
bottom line in a quantifiable way, but can still have a positive impact. It can be neglected by the top
management since it doesn't directly affect the income statement. Cost avoidance creates important
strategic value as it often targets strategic spend like new investments or technologies that have no
comparable purchase for instance. As you can see on our example, it is calculated as a percentage that
can be broken down into the different categories of suppliers, that you can track alongside the cost
savings performed, to better measure the impact of your efforts.
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Performance Indicators

Develop a strategy to map your cost avoidance internally and combine it with the cost reduction.

Relevant Showcase Dashboard

 Procurement Cost Management Dashboard

Procurement ROI

Determine the profitability of investments in your procurement department

Last of our procurement metrics, Procurement ROI is however not the least. The Procurement ROI
differs from the regular ROI usually calculated with the formula ROI = (Gain from investment – Cost of
investment) / Cost of investment. For many professionals of the sector, it is the most important of all
procurement KPIs, but it is not the single best and should be analyzed alongside other metrics to have
the big picture. To calculate the Procurement ROI you need to divide the annual cost savings by the
annual internal cost of procurement, and express it as a ratio. It is a good single metric but of course
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does not speak for the broader “scorecard of supply”, and does not include cost avoidance. Besides, if
the procurement investments are too low, you are more likely to measure the hard cost savings mainly,
without the avoidance and other value chain improvements.

Performance Indicators

Procurement ROI should have a massive payback, and setting it 10 times higher than the internal
investments for the procurement department is a good target.