10 Procurement KPI's, Part I
PurchTips - Edition # 180 June 16, 2009
By Charles Dominick, SPSM
How Do You Compare Procurement Performance?
To know how well your organization is performing, you need numeric baselines or points of comparison. The baseline can be your prior years' performance. But it is most helpful if you use the same key performance indicators (KPI's) as other organizations you benchmark with or those published by a research firm, such as:
- Cost Savings. This is the aggregate amount of money you've saved by reducing costs from one year to the next. This KPI measures the procurement department's lump sum contribution to the financial success of the organization.
- Managed Spend as a Percentage of Total Spend. Total Spend is the amount of money your organization spends externally on products and services each year. It does not include salaries. Managed Spend is the amount of spend that the procurement department controls. This KPI measures the degree of trust that management places in the procurement department's capabilities.
- Cost Savings as a Percentage of Managed Spend. This KPI measures how effective the procurement department is with responsibilities it has been given.
- Procurement Operating Costs as a Percentage of Managed Spend. Procurement operating costs represent the costs the organization incurs for having a procurement department. The cost components may include pay, benefits, facilities costs, equipment and software costs and more. This KPI measures the procurement department's cost efficiency.
- Return on Investment. To calculate return on investment, you must first calculate your "return." In other words, by how much does your cost savings exceed your operating costs? Then, divide that number by the operating costs to determine return on investment. This KPI measures the procurement department's cost effectiveness.
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