Four procurement Key Performance Indicators every Board should be measuring
A year into the pandemic; a good time to reflect on how uncontrollable and unpredictable external influences can be on an organisation’s profits. Measurement of your procurement function can be the first step in leveraging more profits, this internal initiative is one that you do have control over. We thought we would share our thoughts on the KPIs which every board should have visibility on.
Many executive boards have no understanding of how good (or bad) their procurement function is
With the cost of bought-in goods and services contributing up to 70% of an organisation’s costs, procurement is a key lever to improve profitability. In this challenging business environment Procurement Excellence has become a strategic necessity and a driver of competitive advantage. However, many Executive Boards still do not have an understanding of how good (or bad!) their procurement capability is.
In many organisations there is a “one-eyed” view. Whilst the top-line is measured; with marketing, sales and business development monitored, measured and reported on at Board level, there is often no clear insight into how the bottom-line is being managed. Executive boards simply have no way to measure or benchmark their procurement effectiveness.
Lack of procurement measurement = profit improvement potential
Our experience shows that this lack of visibility and measurement is an indicator of the maturity of a procurement function, and hence, a strong signal that profit margin could be improved through improving operational performance.
The old adage that "what gets measured, gets changed" applies directly to procurement. So, from the perspective of an Executive Board what should they be looking for?
Four procurement KPIs that the Board should be monitoring
- Savings. The base measure of procurement effectiveness. Organisations must have a set of savings definitions in place and agreed by finance, and savings must be cash-releasing; something the CFO will sign-off on making a measurable impact on EBITDA.
- Procurement ROI (return on investment); In its simplest form, very simply the savings delivered by a procurement team divided by the cost of that team. Team costs are made up of a fully loaded FTE cost plus annual costs of systems and other procurement support costs, whilst savings are measured annually. Procurement ROI benchmarks will differ according to maturity of a function; from 3 to 14.
- Sourcing velocity; measures the amount of spend that is market-tested, on an annual basis. Sourcing velocity provides a clear understanding of how much strategic sourcing activity a function is undertaking. Organisations that are not putting their incumbent suppliers into competition are likely to be allowing cost inflation and will not be driving savings.
- Supply-base turnover; measures the amount of spend that is proactively switched to new suppliers and provides a strong indicator of pro-active introduction of new, more competitive, innovative suppliers to the organisation. Organisations with a stagnant supply base are not taking advantage of lower-cost suppliers nor supply-market innovation.
Procurement ROI = financial results/investment in procurement
So, how good is your procurement? The first indicator is simply whether there is any measurement at all, and the secondary indicators demonstrating performance against the four KPIs.
If you don't have visibility of your cost management performance, there is a positive; there will be untapped profit potential!
Points to consider:
- Procurement KPIs are an indicator of procurement effectiveness
- Boards should have clear metrics into the operational performance of the procurement function
- If metrics are non-existent, or weak, procurement is likely to be undeveloped and there is likely to be profit improvement potential
Procura's Procurement Capability Assessment can rapidly define your organisation's procurement capability and our Opportunity Assessment can identify and quantify precise savings potential. To find out more, please get in touch.
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