Procurement is a function run primarily on hard data - technical specifications, cost avoidance and cost reduction calculations, TCO figures, ROI, etc. The profession tends to attract people who get excited by well-designed spreadsheets and hard-earned savings. These numbers often appear black and white, but a gray area emerges when deciding which numbers to use, especially when they’re in the form of KPIs used to evaluate the performance of the procurement team.
KPIs (key performance indicators) sprout from the oft-quoted business adage: “You can’t manage what you can’t measure.” The need for KPIs comes from wanting to understand Procurement's performance and the need to show progress to upper management. They help prove Procurement’s value to the organization, and they can be used to guide and focus the department’s daily activities.
However, merely having KPIs doesn’t mean your team will benefit from the insight they can provide, which is why choosing KPIs can be such a complex task. A recent LinkedIn discussion on the topic in the Procurement Professionals group garnered over 200 likes and 200 comments. Since the discussion is only accessible to members of the group, we wanted to provide a summary of the top seven most important points to consider when creating procurement KPIs. They are in no particular order, seeing as they are a general list of things to think about rather than a step-by-step guide for picking KPIs.
1. “KPIs in a well-matured procurement department should also have a strategic side. A focus on outcome rather than process would encourage suppliers - and company's employees - to innovate. That is, meeting a procurement objective is what is measured, as opposed to compliance with firmly set steps.”
~ Irina Gordienko, Strategic Procurement and Contracts Optimization Consultant
While process KPIs can be motivating and help prioritize tasks, sometimes strict adherence to an inflexible set of procedures can hinder supplier and employee innovation. Obviously, procurement policy must be followed, and certain procedures must be followed in order to limit procurement corruption, but consider adopting KPIs with a more strategic focus to supplement process KPIs.
2. “With any measurement, [think about] what are you looking to measure and what are the benefits for both you and the person being measured.”
~ Colin A. Ward, Legal Services - CW Contract Law and Legal
Think about the reasoning behind establishing your KPIs. How will your department use them? They should be used as a carrot for improvement rather than a stick for falling short of the benchmark. It’s also equally wise to remember that procurement performance can’t always be measured in black and white. More nuanced, complex evaluations should accompany KPIs.
3. “Make sure that whatever KPI data you collect is actually analysed and used. I have been in too many organisations where the collection of KPIs becomes rote and they are not actually used to any great benefit in the improvement of PERFORMANCE. It almost seems that the collection (or not) of KPIs becomes a KPI in itself!”
~ Terry Wells, Director at Wells Oilfield Services Limited
Never set KPIs just for the sake of having them. Their analysis should become an integral part of your business practice. Establish a time for looking at them, whether it’s monthly, quarterly, or annually. Consider, too, that some KPIs might need to be analyzed more frequently; you don’t necessarily have to look at them all at once. Furthermore, they are dynamic measurements. You many find that KPIs you established several years ago are no longer relevant, or perhaps the organization has changed direction and your KPIs have to reflect new objectives. It’s always easier to add more KPIs than it is take them away, so start with a couple core ones first; you can add more later if you decide more measurements will help you to better track performance.
4. “Think about the bottlenecks in your processes, the frustrations you encounter and use these ideas as the foundation to developing your personalized key performance indicators specific to your business. Impactful KPIs take a lot of introspection, thought and data collection. This is how you will lead changes within your organization that will make it great.”
~ Judi Ahrikencheikh, Senior Commodity Manager at Emerson Climate Technologies
The most useful KPIs are the result of “introspection, thought and data.” Using data to help you choose what data you will analyze may seem counterintuitive, but it can help guide you by showing you where you might have blind spots or where you need a bit more insight. You can also ask for thoughts from your team; their collaboration could prove invaluable.
5. “Your KPIs should tie back to your company's prevailing strategy. If quality is a significant issue than the preponderance of KPIs should lean that way. If it is cost reduction, then obviously reducing financial impact is paramount. But what about long term? How about measuring suppliers on their technical capabilities beyond your immediate needs? What products will lead your company three years from now; how prepared are your suppliers to contribute to that success?”
~ Bob Ribeiro, Vice President of Global Supply Chain Management
Again, this brings up the importance of tying KPIs to business strategy. And strategy is tied to the organization’s long-term goals. In order for Procurement to prove its value to its internal customers, it needs to show that as a function, it, too, can help propel the organization towards its goals.
6. “I've always thought a great KPI for Procurement is internal customer satisfaction index since our primary function is a service provider to the organization. There are great survey tools out there. The problem is that it can be subjective and people tend to ‘blame’ Purchasing when we are actually highly dependent upon input from other functions. Still - we should be super focused on excellent customer service to the organization.... it's really the most important thing we have to offer.”
~ Cynthia Down, CPM, PMP, Director of Supply Chain Management at Zodiac Aerospace
As a function, Procurement has become more collaborative and customer-centric. Measuring customer satisfaction can help you see if your department is on the right track. While survey results can be turned into numerical statistics, a customer survey can also be a great tool to get written feedback that can then be turned into guidelines for improvement.
7. “Just one suggestion to keep in mind while implementing these KPIs: we should make sure we don't throw the baby out with the bathwater! For example, if the focus is on saving, but the delay in negotiations leads to your company missing a product release by a quarter, then you have done more damage than good. Sometimes, efficiency concerns outweigh the cost savings.”
~ David Mortaz, COO at Stealth Mode Startup Company
When setting KPIs, look at how they reflect your priorities. Does prioritizing one measurement come at the cost of another? Make sure your team members understand the intention behind the KPIs. There may be situations where it might be necessary to take actions which don’t align with meeting the KPI if it results in a decrease in performance elsewhere in the supply chain. Your team should have the flexibility it needs to make these types of calls without worrying about the repercussions.
We look forward to hearing what else you might like to add to the conversation. Please share your comments below!