The ‘Right’ Procurement Metrics

In today’s high inflation and supply-constrained environment, it is more critical than ever that procurement functions work on the right set of priorities to drive value to the organization. However, such traditional procurement metrics as year-over-year savings may be inadequate or misleading in measuring the true value that procurement delivers.

For procurement to deliver its full potential to the organization — and for that success to be accurately measured — an expanded set of metrics should be considered.

Our research indicates there are seven key measurable dimensions, though not all are required for every type of business. Asking the following questions will help build an understanding of where the procurement organization stands across each dimension.

1) Ensure Supply Continuity

Questions

• How closely is procurement working with suppliers to maintain capacity and assure on-time delivery of quality materials and services to plants, as well as finished products to end customers?
• Has the team established prioritized customer relationships with key suppliers to ensure it receives the proper collaboration and prioritization from those suppliers, as well as the best ideas to support competitive advantage?
• Is procurement dual-sourcing supply of critical and/or high-volume products?

Sample metrics and KPIs

• Percentage of in-full deliveries
• Percentage of on-time deliveries
• Percentage of deliveries free of quality issues/defects.

2) Mitigate Price Increases and Reduce Unit Costs

Questions

• How is procurement enabling and collaborating with the broader business to collectively manage suppliers’ requested price increases?
• Is the organization requiring suppliers to provide detailed rationales to support their proposed price increases?
• Is procurement using the right levers to negotiate down price increases — for example, through encouraging suppliers to take a long-term view of the relationship or enhancing the competitive environment — and baking into agreements the right terms to assure prices adjust when supplier costs fall?
• Is the team ensuring suppliers are also bearing a fair share of the burden of current price increases and risk of potential future price increases?

Sample metrics and KPIs

• Amount of cost avoidance
• Amount of year-over-year savings
• Average percentage reduction from credible supplier-proposed price increases.

3) Accelerate Demand Management Initiatives

Questions

Does procurement:

• Collaborate with business units and functions to develop demand management initiatives like reduction of consumption or insourcing?
• Support business units in ensuring demand management initiatives are executed efficiently?
• Establish execution plans detailing owners, time lines and milestones, while setting up a mechanism to track savings?

Sample metric and KPI

• Amount of demand management impact achieved.

4) Deepen Supplier Relationships

Questions

Does procurement:

• Establish or expand its long-term, preferred supplier program?
• Invest its available capacity in mutually beneficial cost reduction opportunities with suppliers?
• Harvest supplier innovations to advance existing products/services and co-develop new ones?

Sample metrics and KPIs

• Number of suppliers participating in the preferred supplier program
• Percentage increase in suppliers participating in the preferred supplier program.

5) Manage Risk

Questions

Does procurement:

• Proactively identify supplier and supply chain risks based on elevated inherent risks?
• Identify and implement improved contractual and value chain measures to reduce or better manage these risks?

Sample metrics and KPIs

• Number of suppliers included in the risk management program
• Percentage increase in suppliers included in the risk management program.

6) Prepare for Price Normalization

Questions

Is procurement:

• Amending contracts to allow for more rapid price reductions as inflation subsides, raw material costs decrease, and/or labor costs decrease?
• Mobilized to rapidly reverse price increases?

Sample metrics and KPIs

• Number of contracts renegotiated/amended
• Number of suppliers with established price adjustment mechanisms.

7) Drive the Broader Agenda

Questions

Does procurement:

• Take an active role identifying and accelerating transitions to more efficient supply chains (such as reducing carbon impact, transitioning to more environmentally friendly products and more sustainable manufacturing processes)?
• Establish and/or support programs to drive improved supplier diversity?
• Have a strategy and plan in place to acquire, retain and develop top talent?
• Progress its digital roadmap to improve the internal customer experiences and streamline processes?

Sample metrics and KPIs

• Percentage reduction in carbon footprint with top suppliers
• Spend with diverse suppliers
• Number of diverse suppliers in funnel
• Diverse supplier growth over time
• Job creation/wealth impact in diverse communities.

***

For this model to be successful, the procurement organization will need the continuing confidence and trust of the executive team. Executives can effectively do this by clearly communicating support for procurement initiatives and giving the function a stronger and more elevated seat at the table to advance corporate cost-reduction priorities.

With executive support, procurement is in a unique position to deliver significant value and a sustainable competitive advantage. But organizations need to refine and modernize how procurement can create this value.

(Proto credit: Getty Images/Klaus Vedvelt)