The purchasing department plays a fundamental role in the success of any company, as we have already seen many times in this blog. It is responsible for ensuring that the organization acquires the goods and services necessary for its operation. To ensure that the purchasing department is meeting its objectives and contributing to the success of the company, it is important to establish key performance indicators (KPIs) that measure its performance.
Although having clear indicators is basic for any task in any department, not all teams are clear on what to measure to keep a company’s procurement under control, so in this article we will analyze some of the most important strategic KPIs for the purchasing department.
Total cost of ownership
Total Cost of Ownership is a metric that measures all costs associated with the acquisition of goods and services, including shipping costs, taxes, duties and other import-related costs. The TCO is a very important KPI for the purchasing department because it allows the organization to understand the actual costs associated with importing goods and services. If the TCO is too high, it may indicate that the purchasing department is paying too much for imported products or incurring unnecessary additional costs, which is why, in many cases, the intervention of a specialized purchasing consultant would be necessary to optimize the process.
Actual budget VS budget variance
The comparison between the budget variance and the actual budget is essential in the monitoring of procurement KPIs. By contrasting the forecast with the actual figures, it is possible to identify deviations and take action to correct them. This allows companies to adjust their budget and make informed decisions to optimize their purchasing processes and achieve their financial objectives.
Procurement ROI refers to the relationship between the investment made in procurement management and the financial return on that investment. In other words, it is the measure of profitability of a company’s procurement activities. Calculating the Procurement ROI is important for companies, as it allows them to evaluate the effectiveness of their procurement strategy and make informed decisions on how to allocate resources to maximize their return on investment. To calculate the Procurement ROI, it is necessary to take into account both the costs and benefits gained through procurement activities, and use this information to determine the rate of return on procurement investment.
Lead time is another important KPI for the purchasing department. If lead time is too long, it can cause inventory problems, delay production and negatively affect the quality of customer service. The purchasing department should work with suppliers to set realistic lead times and ensure that they are met.
Cost savings (and savings VS costs)
Cost savings is a very important KPI for the purchasing department. For that reason, it is imperative to do a good job of selecting and negotiating with suppliers to obtain the best possible prices and to look for ways to reduce the costs associated with international purchasing. In addition, the purchasing department must closely monitor costs and look for opportunities to reduce them.
In that sense, it is also important to keep a strict control on savings VS costs, a KPI that allows to compare the expected savings and costs with the real ones and that makes it possible to optimize the different phases of the purchasing process.
Supplier satisfaction is an important KPI for the purchasing department because it can have a significant impact on the organization’s ability to obtain the best prices and delivery times. If suppliers are dissatisfied, they are less likely to offer competitive prices or fast delivery times. In this context, one of the tasks of the purchasing department will be to work to keep suppliers satisfied and thus be able to negotiate better terms.
Safety inventory is an additional amount of inventory held in stock to ensure that the organization does not run out of inventory during periods of high demand or during import delays, avoiding a dreaded stock-out. The purchasing department must establish appropriate safety inventory levels and ensure that they are met.
Leave all these KPIs in the hands of an expert!
The purchasing department must work every day to make the supply chain as efficient as possible and to reduce the costs associated with importing. Thanks to these (and other) strategic KPIs, you will be able to monitor the supply chain well and take immediate action to address any problems.
However, there are many situations where you will need the help of an external specialist team to improve your procurement processes. In that sense, at S3 Group we have been working for 20 years to ensure an effective and efficient import for our customers, managing their suppliers, the quality of their products, logistics or analyzing the strategic KPIs of their purchasing department.