KPIs for Purchasing Managers: A Complete Guide

ControlHub
July 7, 2022

In startups, every decision can tip the scales of success or failure. One of these critical decisions revolves around procurement management. This is especially true for hardware-focused startups, where a smooth procurement process is the lifeblood of efficient production and cost management. Delays or missteps here can lead to a domino effect of challenges.

Before diving into the complexities of procurement, it's essential to establish clear, measurable objectives. What are you aiming to achieve with your procurement strategy? These goals set the stage for a focused and practical approach.

How do you know if you're on the right track? This is where Key Performance Indicators (KPIs) come into play. These metrics act as a compass, guiding startups through the often-turbulent waters of procurement. They help align procurement strategies with broader business goals and meet stakeholder expectations.

This post isn't just about throwing jargon around. It's a practical guide designed to help procurement managers, armed with tools like purchase order software, purchase requisition software, and purchase approval software, identify and leverage the most crucial KPIs, whether in a sprouting startup or a flourishing business. 

The aim? To streamline your procurement process, incorporate these advanced software solutions to avoid common pitfalls and ultimately drive your business towards its goals. But it's not just about knowing which KPIs to track. 

It's also about what you do with that information, utilizing these procurement software tools for better management. This guide will walk you through actionable steps to refine your procurement process based on the insights from your KPIs.

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What are KPIs?

KPIs, or key performance indicators, are a crucial metric in the procurement process, used extensively by procurement teams to measure and track progress. They represent specific, quantifiable goals that provide valuable insights into whether procurement strategies are effective. 

Procurement managers, in particular, rely on KPIs like Purchase Order Cycle Time and Supplier Defect Rate to track their progress in meeting cost, quality, time delivery, and delivery targets. These metrics are invaluable for procurement departments in businesses of all sizes, especially those experiencing rapid growth or significant changes. 

By providing actionable insights, KPIs help ensure standards are met and procurement ROI is achieved.

Why are KPIs important?

KPIs are vital for the efficient functioning of the procurement department, offering a way to measure progress and ensure its adequacy. They play a significant role in various aspects of procurement management:

Help Identify Problem Areas

If a procurement KPI, such as the Emergency Purchase Ratio or Supplier Performance, is not being met, it can reveal the root cause of the issue. This information allows procurement leaders to implement process improvements and enhance procurement performance. For example, suppose the annual cost savings target needs to be met. In that case, the procurement manager can investigate areas of high operating costs or maverick spending and strategize cost reduction or procurement cost avoidance.

Encourage Positive Behavior

Startups can leverage procurement KPIs to foster positive behavior within their teams. Setting goals related to Cost Of Procurement or Supplier Lead Time can track progress and potentially offer incentives for meeting targets. This motivates the team and aligns their efforts with the business goals, ensuring a positive impact on the procurement function.

Monitor Progress

KPIs are essential for monitoring the efficiency of procurement processes, especially in dynamic environments. A procurement metric like Purchase Price Variance or Compliance Rate helps in pinpointing areas needing improvement, enabling procurement organizations to adapt and refine their strategies accordingly.

Facilitate Decision Making

Procurement KPIs, such as Cost Of Purchase Order or Percentage Of Suppliers Meeting Delivery Time, aid procurement professionals in making informed decisions about resource allocation. For instance, if the goal is to improve cost savings, the purchasing department can use these KPIs to identify high future costs areas, thereby guiding decisions that enhance the efficiency and effectiveness of procurement investments.

KPIs serve as an essential tool for procurement managers and procurement organizations, aiding in cost avoidance, supply risk management, and ensuring procurement processes align with overall business objectives.

Types of KPIs for the Purchasing Manager

There are many types of KPIs that the purchasing manager can use many KPIs to track and improve procurement efforts.

Supply Chain KPIs

Supply Chain KPIs are crucial for monitoring various aspects of the procurement process. They provide a complete picture of how effectively the procurement department handles supply categories, manages supplier relationships, and ensures invoice accuracy. 

These KPIs assess supplier performance, including tracking delivery times and defect types, essential for maintaining quality standards. Examples of supply chain KPIs include:

  • On-time delivery
  • Order fill rate
  • Supplier performance
  • Inventory turnover ratio
  • Warehouse efficiency
  • Supplier availability rate
  • Supplier quality rating, focusing on the ratio of product defects and supplier failures

Customer Satisfaction KPIs

Customer Satisfaction KPIs are key in assessing how procurement policies and practices impact the end customer. These KPIs track the effectiveness of customer service and identify opportunities for improvement, which can lead to a competitive advantage. Examples include:

  • First contact resolution rate
  • Average handle time
  • Customer satisfaction score
  • Net promoter score
  • Number of complaints

Operational KPIs

Operational KPIs provide insights into the internal functioning of the procurement department over a certain period of time. They can help in identifying substandard products and inefficiencies in the procurement process. Examples include:

  • Attendance rate
  • Employee turnover rate
  • Number of errors
  • Cycle time, reflecting the efficiency of procurement processes
  • Purchase order accuracy, measuring the precision in order generation and invoice closure

Quality Control KPIs

Quality Control KPIs are vital for tracking the effectiveness of quality assurance measures in procurement. These KPIs focus on identifying defective products, maintaining individual quality, and ensuring adherence to quality standards. Examples include:

  • Defect rate
  • Yield
  • Number of reworks
  • First pass yield
  • Ratio of emergency purchases, indicating potential issues in procurement planning

Financial KPIs

Financial KPIs are essential for evaluating the financial impact of procurement efforts, including procurement cost reduction and the effectiveness of contract management. They provide insights into the overall financial health of the procurement function. Examples include:

  • Revenue
  • Gross margin
  • Profitability
  • Return on investment (ROI)
  • Cash flow
  • Total cost savings, reflecting the success of procurement cost reduction strategies
  • Internal cost savings, highlighting the efficiency of cloud-based digital procurement systems

These KPIs collectively offer valuable information for the procurement manager, aiding in supply chain optimization, enhancing supplier management, and improving overall procurement performance.

5 Essential KPIs for the purchasing manager

There are many types of KPIs that the purchasing manager can use. However, not all KPIs are equally important. Here are five essential KPIs that every purchasing manager should track:

Reliability of contractual terms

At the heart of every supplier relationship lies the bedrock of contractual terms. These terms define expectations regarding delivery schedules, product quality, and pricing. Quality suppliers are those who consistently honor these terms.

When suppliers fall short of their contractual obligations, it can trigger a cascade of issues for businesses, ranging from production holdups to escalated costs. It's a scenario every purchasing manager wants to avoid.

A key responsibility of the purchasing manager is to monitor how often suppliers fulfill their contractual terms. This is more than just a number; it reflects supplier reliability and the health of your supply chain.

The purchasing department should engage in a twofold strategy to enhance this key performance indicator (KPI). First, work closely with suppliers to set clear, achievable contractual terms. Second, collaborate with internal teams to ensure these contracts are diligently upheld. It’s a team game where effective communication and teamwork are pivotal in success.

In essence, suppliers must stick to their contractual terms is crucial. It’s not just about keeping suppliers in check; it’s about safeguarding your business from unforeseen setbacks and maintaining a smooth operational flow. For a purchasing manager, mastering this aspect of supplier management can make all the difference.

Procurement process efficiency

The role of a purchasing manager centers heavily on monitoring the effectiveness of the procurement process. This involves scrutinizing every phase, from the time taken to place an order to the moment goods are received, and the frequency of errors in ordering.

A lagging purchasing process isn't just a minor hiccup—it can lead to significant setbacks like production delays and rising costs. These are pitfalls that any business would want to avoid.

To enhance this procurement key performance indicator (KPI), purchasing managers need to take proactive steps. A great starting point is the automation of routine tasks. This includes simplifying order placements and streamlining invoice processing. By doing so, not only does efficiency improve, but it also minimizes the chances of errors creeping in.

Another vital strategy involves strengthening communication and collaboration with other departments. This isn't a one-department show; it's a collective effort where seamless 

For a purchasing manager, optimizing the purchasing process is essential. It's about being smart with technology, such as automation, and fostering teamwork across the organization. Get this right, and you're not just speeding up procurement; you're driving your business forward.

Supplier performance

Suppliers play a vital role in the business's success. The purchasing department should track supplier performance to ensure that these suppliers are meeting quality standards and delivery times.To improve this procurement KPI, the purchasing manager can work on:

 

  • Evaluating supplier performance
  • Improving communication with suppliers
  • Working with suppliers to improve quality standards
  • Setting up systems to track supplier performance

These are just a few ideas to get started. The purchasing manager should work with the team to come up with the best plan of action to improve supplier performance and define your preferred suppliers.

Average purchase value

The Average Purchase Value represents the mean amount spent per procurement transaction. This procurement Key Performance Indicator (KPI) offers insights into spending patterns and helps gauge if the company is spending wisely.

Thepurchasing department should engage in two key activities to enhance this KPI. First, negotiate with suppliers for better deals, aiming to reduce costs without compromising on quality. Second, collaborate with other departments to ensure every purchase is truly needed, avoiding unnecessary expenditures.

Emergency purchase rate

The Emergency Purchase Rate quantifies the instances of purchasing that happen outside the standard protocol. These purchases are typically reactive, made in response to unexpected events like production hiccups or quality issues.

To lower this rate, the purchasing department needs to establish robust communication channels with other company sectors. Being forewarned about potential issues allows for preemptive action, reducing the need for last-minute purchases. Additionally, implementing systems to monitor these emergency buys is crucial for pinpointing and addressing underlying problems.

For a purchasing manager, managing the Average Purchase Value and Emergency Purchase Rate is about striking a balance between efficient spending and preparedness for unforeseen scenarios. It involves smart negotiation, internal collaboration, and proactive planning to ensure smooth and cost-effective procurement operations.

What to consider when deciding on KPIs

With so many KPIs to choose from, it's difficult to decide which ones to track. Here are a few factors to consider when deciding on KPIs:

Business goals

Every business has different goals. Teams should align the KPIs that are tracked with the goals of the business. It is important to track KPIs that will help the business achieve its goals. For example, if the goal of the business is to increase sales, then a KPI such as average purchase value would be more important than the number of errors made during the ordering process.

Stakeholder needs

The stakeholders in the business have different needs. Stakeholders include the shareholders, employees, customers, and suppliers. It is important to track KPIs that apply to the needs of the stakeholders. For example, if the goal of the business is to increase shareholder value, then a KPI such as return on investment would be more important than supplier performance.

Data availability

A critical factor to consider when deciding on KPIs is the availability of data. Data availability can depend on the software that is being used, the resources of the business, and the data collection process. It is important to track KPIs that can be accurately measured. For example, if a business has sufficient data on supplier performance, it can be tracked as a KPI and used to improve supplier performance.

Cost

Tracking a procurement KPI can be costly. The cost of tracking KPIs includes the software, hardware, and resources required. It is important to track KPIs that will benefit the business most. You must also consider the cost of not tracking a KPI. For example, if a business is not tracking supplier performance, it may miss opportunities to improve it.

Steps to improve KPIs

Once the KPIs have been decided, the next step is to improve purchasing performance. There are many ways to improve purchasing performance based on KPIs. Here are a few ideas:

Train employees

Managers should train employees properly so they can carry out their duties. Training can improve performance by teaching employees the skills they need to do their job. The purchasing department should work with the HR department to develop employee training plans. This plan should be aligned with the business goals and the KPIs that are being tracked.

Invest in software

Software can automate processes and improve performance. Using solutions such as procurement software can help the purchasing department to automate the purchase process. This will free up time for the purchasing department to focus on other tasks. These solutions offer a variety of features that can help to improve performance. For example, they can help to track supplier performance and automate the purchase process.

Monitor KPIs regularly

Purchasing managers should monitor KPIs regularly. The purchasing department should review the KPIs at least monthly. This will help to identify any trends and take action to improve performance. For instance, if the number of errors made during the ordering process is increasing, the purchasing department can take action, such as training employees or investing in software.

Make contingency plans

Purchasing managers should make contingency plans in case of problems. Contingency plans can help to avoid disruptions to the supply chain. For example, if a supplier is not performing well, the purchasing department can source goods from another supplier. Emergency purchases can also be made from other suppliers, ensuring the business can continue operating.KPIs are a valuable tool for the purchasing manager. 

They can help to improve performance by aligning with business goals, stakeholder needs, and data availability. When deciding on KPIs, it is essential to consider the abovementioned factors. Once the KPIs have been decided, the next step is to take action to improve performance.

Control Hub can help you improve your KPIs by monitoring them regularly and providing insights to help you take action. An all-in-one platform to manage purchases, Control Hub offers a range of features to help you improve your KPIs. Find out more by getting a free demo today.

Learnings

Procurement holds a pivotal role in hardware-centric startups, where agility and efficiency are key to keeping pace with the fast-evolving market. Procurement managers in these startups face the critical task of sourcing materials effectively while balancing costs.

Key Performance Indicators (KPIs) emerge as vital tools for measuring procurement team performance. These metrics are more than just numbers; they pinpoint areas needing improvement, inspire positive actions, keep track of progress, and guide decision-making processes.

We've delved into various KPIs that purchasing managers can employ, spanning from supply chain and customer satisfaction to operational, quality control, and financial aspects. Understanding these KPIs is crucial for a comprehensive view of procurement effectiveness.

The discussion highlighted five crucial KPIs: reliability of contractual terms, efficiency of the procurement process, supplier performance, average purchase value, and emergency purchase rate. These indicators are key to understanding and enhancing procurement operations.

When selecting KPIs, startups need to align them with their business objectives and stakeholder needs, considering factors like data availability and the cost of tracking these indicators.

To boost their procurement KPIs, startups can take several steps, such as training their staff, investing in advanced software solutions, regularly monitoring KPIs, and preparing contingency plans for unexpected scenarios.

FAQS about procurement kpis

What are KPIs, and why are they important for startups?

KPIs, or Key Performance Indicators, are awesome metrics that help startups keep track of their performance. They're like a secret sauce to success, showing you what's working and not, and how to improve things! With KPIs as your trusty compass, you can identify trouble spots and opportunities for growth, ensuring smooth sailing for your business.

How do KPIs motivate the team?

Positive vibes only! KPIs are all about setting targets and celebrating when your team reaches them. Think bonuses, high-fives, and the whole shebang. With motivated team members, your business is bound to thrive!

What KPIs should procurement managers track?

Just like picking toppings for a pizza, we have a KPI menu for you! You can track Supply Chain, Customer Satisfaction, Operational, Quality Control, and Financial KPIs. Each one is crucial in keeping your startup on the path to success.

Can you share five essential KPIs for procurement managers to start with?

Absolutely! Here are five must-have KPIs for every procurement manager:

  1. Reliability of contractual terms
  2. Procurement process efficiency
  3. Supplier performance
  4. Average purchase value
  5. Emergency purchase rate

Keep an eye on these, and you'll be dancing your way to success!

How can startups level up their KPI game?

Great question! Here are four strategies to boost your KPI game:

  1. Train your team to conquer the procurement world with new skills.
  2. Invest in software automation to save time and boost efficiency.
  3. Regularly monitor your KPIs to spot trends and make game-changing decisions.
  4. Be prepared with contingency plans to handle any curveballs life throws your way!

What is Control Hub, and how can it supercharge my KPI journey?

Control Hub is the magical all-in-one platform that takes your procurement management to the next level! With Control Hub, you can monitor your KPIs, gain valuable insights, and take action like never before. It's your secret weapon for success!

What is Procure-to-Pay?

Procurement is acritical component in any company's supply chain because it determines whatresources are going to be used to operate a business, and which suppliers aregoing to be chosen to procure the required goods and services. Procure-to-pay(P2P) consolidates the procure-to-pay process by combining all procurementactivities with an organization's cash management system. 

This includesreceiving invoices from suppliers, making payments to suppliers by credit cardor e-check, and capturing and reconciling invoices with POs.

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