"Measurement is the first step that leads to control and eventually to improvement. If you can't measure something, you can't understand it. If you can't understand it, you can't control it. If you can't control it, you can't improve it."
- H. James Harrington
How much? How many? How often? Who? What? Where? Why?
When you analyze your business practices to answer these questions, you are creating data. There are two types of data, qualitative and quantitative. Qualitative data may take the form of feedback from customers, observations, and comments, basically anything that cannot be put into numbers. Quantitative data, on the other hand, deals with information that’s easy to express in numerical format. These numbers are essentially measurements - costs, units sold, delivery time, etc.
Once you have these measurements, you can use them to create metrics. Metrics show the relationship between two or more measurements. You can compare them to analyze how one area affects another or use them to make predictions about future performance. Metrics help you identify changes, both positive and negative, and give you the information you need to make decisions throughout the procurement process.
Key performance indicators
Now this is where KPIs (key performance indicators) come in. KPIs are groups of metrics unique to your specific business processes. KPIs vary by industry, company, and by department within individual companies. For example, the marketing department’s KPIs will likely differ from the procurement department’s and so on. Departments may even choose to use different KPIs for different projects. Above all, KPIs should follow the SMART criteria: specific, measurable, attainable, relevant, and timely.
- Total cost savings
- Cost avoidance
- On-time delivery
- Procurement ROI
- Managed spend as percentage of total spend
KPIs help you identify areas of success and areas in need of improvement. Procurement is a dynamic department. Just as you should frequently review your suppliers, so should you review your KPIs. They should relate to the company’s overall goals and reflect your department’s identified objectives.
How to get started
If your procurement department hasn’t established a set of KPIs, start small. Look at the data you already have on hand, such as the amount of spend per supplier. Start with two or three KPIs using these easily obtained metrics. Once you have analyzed your department’s performance according to these KPIs, then identify where you would like to improve or what data you would like to gather. Then you can begin building up a list of the KPIs unique to your organization.
Free guide to using KPIs
To help get you started, you can download a practical guide to procurement KPIs.
It includes a list of cost, delivery, and quality KPIs, along with tips on how to set them up and what to avoid when adopting new KPIs.