Goal-setting in procurement is nothing new. After all, it’s not like your procurement team is just wandering into a 7/11 and picking up the first thing that catches their eye. Your company has a need, and it’s the procurement team’s goal to fill that need to the best of their ability. That ambiguous “best of their ability” however, is the catch that we hear skipped time and time again by company executives. Truth be told, many executives have only a high-level understanding of procurement, and what it really means to have that department excel. Here, I’ll get down to brass tacks; I will give you the metrics you need to track your procurement efforts and learn why understanding goal-setting is essential to your purchasing process.
Procurement is closer to finance than, say, creative branding. Like finance, procurement focuses on quantitative information, the time value of money, and ultimately value. But while any college student studying business can tell you something about finance, very few would be able to describe the metrics of procurement.
Here are the metrics you should know about procurement KPIs:
- Spend – If you don’t know how much you’re spending, then you have bigger problems!
- Time to Purchase – Generally companies seek to reduce the time to purchase so that the rest of the organization can gain quicker access to solutions.
- Opportunity Cost – We wrote a post about the intricacies of opportunity cost in procurement, but the short story is that every hour an employee spends on a purchasing project is an hour they could be using for something potentially more important.
- Spend Under Management – Procurement teams are created to manage spend. If your team isn’t managing enough of that spending, then you likely have sub-optimal purchasing processes that could potentially be wasting millions. One reason that spend under management is low in some companies is because involving the procurement team in purchase decisions is seen as inefficient until a project reaches a certain threshold of spend.
- Cost of Procurement as a Percentage of Spend – If running a purchasing event costs 50% of the service purchased, then clearly there are some inefficiencies in the process. Minimizing the cost of procurement as a percentage of spend should be a high priority for any procurement team.
- FTEs per Unit of Spend Under Management – Human capital is a precious resource, and it must be deployed well. If the number of Procurement FTEs per Unit of Spend Under Management (usually measured in millions or billions of dollars, depending on the size of the organization) is too high, then either the procurement team is oversized for the organization, or Spend Under Management is too low for the size of the procurement team. Most often, the latter is the case.
- Total Cost Savings – This is one of the direct impacts of any procurement team. How much money is the team saving the company compared to the base case of having no procurement function?
- Quality of goods/services purchased – This metric can be difficult to measure depending on the context, but is no doubt one of the most important metrics for a successful procurement team. You can track this metric more quantitatively by employing periodic satisfaction assessments for large purchases.
- Procurement ROI – Ultimately the company is seeking some kind of return from having a procurement process. At the end of the day, if Procurement isn’t producing a positive ROI, then how can the company justify having the team?
Goal setting and metrics are hand-in-hand
If a goal without a plan is just a dream, then a plan without metrics is a nightmare. Jotting down a rapid plan to achieve lofty departmental goals is cathartic, but when your team meets at the end of the quarter to talk about your procurement accomplishments, are you going to have enough metrics for an informed discussion? Investing time in building key metrics will save you headaches when you sit down for that review meeting. Instead of having an unproductive meeting whose content could have been distributed more efficiently via email, your team can critically evaluate your procurement process with the metrics that you have been tracking.
Who benefits from goal setting?
The purchasing team and the executive team concerned with spend benefit directly from goal setting because they can see how their work will contribute to the success of the entire organization. Having clearly defined and metric-driven goals gives a stronger sense of purpose to the procurement team and enhances the focus and motivation needed to achieve tangible growth.
Your purchasing process changes according to your goals
Knowing your goals beforehand will influence the operation of your purchasing process. For example, if the goal for your procurement team is to reduce the time to purchase by 50%, a lengthy multi-round RFP process would be a time suck for your strategic sourcing process. Instead, you would want to create one very crisp RFP to gather the information you need to make an informed decision. That being said, your team will have multiple goals for your procurement metrics, and the context of the purchasing project is important. If the team is charged with securing a long-term partner, then the quality of the purchase could significantly outweigh the need for speed.
RFP management software, up and to the right
Tracking metrics manually is a pain. Doing anything manually is a pain for that matter. That’s why RFP management software automates as much of the procurement process as possible so that your team can focus on the strategy, and leave the mundane execution to software. After all, you don’t see accountants tapping away on tape-printing calculators anymore or Human Resources keeping a cabinet full of employee folders, so why should procurement still be using emails and excel to tackle complicated multi-faceted purchasing projects? RFP management software not only helps you track the metrics that determine the success of your procurement team, but it also helps you improve them… automatically. Slash your opportunity cost by having a central database of documentation to avoid wasting time searching through poorly organized file systems, drastically reduce your time to purchase with real-time collaboration, and improve the quality of goods/services purchased by increasing the visibility of relevant comparisons.
If you want to see Vendorful’s software first hand, schedule a demo of our vendor management services.