It is known that efficient procurement is a key factor for a company’s profitability. But how do we actually know that procurement is efficient? We definitely cannot rely on a “by eye” assessment or intuition, we need to have precise data in order to be able to talk about the level of efficiency. Therefore, the question that arises is – how to accurately measure the success and efficiency of procurement?
These measurements are truly important because they allow us to optimize processes, identify shortcomings or weaknesses, and improve overall business operations. In this blog, we will explore which key metrics and methods are used to measure procurement performance and whether it can be measured exactly at all.
Seven examples of measuring procurement efficiency and success
- Measuring savings
One of the basic ways to measure procurement performance is to track savings. This measurement essentially tells us how much procurement has managed to reduce costs through negotiations, quantity optimization, use of alternative suppliers, etc. This information is very easy to measure, especially with procurement software solutions that offer analytics. It is important to note that you do not track savings solely through price reductions. Also pay attention to quality improvement, waste reduction, and logistics optimization.
- Measuring the duration of one procurement cycle
With this metric, you are essentially measuring the time it takes from the moment a purchase requisition is received to the moment it is delivered. Shorter cycles usually mean greater efficiency and better control over inventory. It would be useful to have data on how long other companies in the industry spend on purchasing certain products and services. This would give you a frame of reference for comparison. This data, as well as savings data, can also be easily obtained using procurement software. There, you can clearly see the dates of the request, the duration of the tender, the date of the purchase order, and so on.
- Measuring supplier efficiency
This metric tracks your suppliers’ performance in terms of delivery accuracy, product quality, and meeting contractual terms. How do you measure this? Simply introduce supplier questionnaires and a procurement checklist. Suppliers will answer specific questions about their business in the questionnaires, and procurement will provide ratings for their answers. An example is the Ensolva SAQ supplier assessment questionnaire. Also include the specific data we listed at the beginning, based on previous cooperation. Finally, quantify the qualitative data with ratings.
- Measuring inventory levels and turnover
Measuring inventory levels and inventory turnover helps optimize storage capacity and reduce inventory costs. Optimal inventory levels are achieved by monitoring key indicators such as inventory turnover, average inventory life, and demand forecast accuracy. Implement just-in-time methods and use digital tools to track inventory in real time. This way, you can constantly measure inventory levels and effectively optimize inventory turnover.
- Measuring the number of completed orders per employee
This metric measures how many orders one employee managed to process in a given period. An increase in the number of completed orders while maintaining quality indicates good employee efficiency. If one employee processes 100 orders per month while the industry average is 80, that employee is performing above average. This data can also most easily be obtained using procurement software where the number of procurement projects per employee can be easily retrieved.
- Measuring forecast and inventory planning accuracy
Accuracy of planning and forecasting is half the job for successful procurement. If procurement can accurately predict inventory needs, this reduces the risk of excessive or insufficient stock. For example, if the forecast of raw material needs for the next quarter deviates only 2% from actual consumption, this shows a high level of expertise in planning. Here, the analytical skills of procurement employees come to the forefront. Of course, using analytical tools and past procurement data, you can accurately plan and forecast needs, but also measure the accuracy of individual employees in this area.
- Measuring internal user satisfaction levels
Internal users, such as manufacturing or sales departments, are often the end users of the products and services procured. Their satisfaction can be measured through surveys or feedback. If a high percentage of internal users rate the procurement team highly in satisfaction surveys, this is a clear indication of their effectiveness. Conduct customer satisfaction surveys regularly and use the results to further improve the process.
How procurement software can help you with this
Measuring procurement performance and the performance of procurement employees is a key step toward improving operational efficiency and achieving the company’s strategic goals. It is most important to first determine criteria, measurement methods, and instruments.
In most measurements, the job is facilitated by procurement software, as we at Ensolva also offer the Analysis and Reporting module for detailed analytical data. However, even using the software without that module provides a kind of analysis since all data is recorded and nothing passes “under the radar.” When you have a clear system of criteria and measurements, you will continuously receive data that should be included in regular reports. These reports will also be an excellent foundation for all future analyses and measurements.
Conclusion
There are many variables and possibilities for measuring procurement performance; we have listed only some examples to highlight the importance of procurement evaluation. Besides ensuring you get the maximum potential from procurement, this will also help you establish a reward system for procurement employees. In this way, you will motivate employees and get the most possible from your procurement!
