Ask procurement managers how they track their purchases to gauge company performance and you’re likely to get a few different answers. Some will immediately mention the cost of purchases, while others may chime in with buzzwords like efficiency and effectiveness. The reality is there are many factors that must be considered when tracking the success of purchases and how they contribute to your organization’s well-being.
1. Procurement Cycle Time
One of the best ways to track efficiency is to look at cycle time, which begins the moment a company decides to order items and ends when the goods are delivered to the warehouse. If there are no hiccups in the cycle (ie. no erratic purchase orders or delayed deliveries), the company benefits from the opportunity to sell its inventory more quickly or take advantage of discounts by paying suppliers sooner. Delays are costly if labor is spent correcting mistakes or streamlining workflow for faster results, so having a procurement process that runs smoothly is paramount.
One sure sign of top procurement performance is using good suppliers who sell your business the best materials at the cheapest rate. Procurement agents use matrices such as number of defects per thousand or million to measure the quality of purchases; the lower the rate, the greater the quality of the purchase. Be aware that shipments with high rates of defective merchandise not only limit the amount of quality merchandise in company inventory, but also prolong the procurement cycle from requisition to delivery if items constantly have to be returned.
3. Cost Savings
The most common approach to tracking procurement is to assess how much is spent on procurement as opposed to what was budgeted during a fiscal period. Naturally, the smaller the actual figure is compared to its budgeted equivalent, the greater the contribution to the bottom line. That said, even when the economy is stable, procurement managers may want to exercise more cost savings in case management directs them to free up funds for new opportunities or other investment prospects.
4. Procurement ROI
This metric is as close as you’ll get to examining the big picture regarding a company’s return on investment (ROI) when it comes to procurement. Since procurement isn’t a revenue base, it’s measured by comparing department costs with the savings it generates. Measuring procurement ROI involves a painstaking examination of your procurement operations, from the amount of labor and wages involved to the supplies and technology being utilized and even the amount of company space occupied. It’s important to remember, however, that procurement is a long-term strategy and should be judged accordingly.
5. Spend Under Management
Spend under management compares strategic sourcing expenditures on products and services against overall expenditures in a given fiscal period. If a department has a high spend under management score, that means it’s able to make a majority of its own purchasing decisions. When a purchasing department has more control over its costs, it’s able to make more strategic, informed decisions. Ultimately, this means a decrease in overall expenditures.
When you’re dealing with an area of your business like procurement, attention to detail can mean big savings for your company. These metrics let you drill into those little details so you can ensure your company is on the right track and all procurement processes are in order. Don’t get stuck in your old ways; be ready to adapt to changes in the industry—from metrics to software.
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