Strategic sourcing initiatives often entail long-term goals and larger staff sizes. For instance, companies that face several purchasing categories often adopt strategic approaches and hire procurement staff for each category. In addition, in-house analysts or outsourced research may be necessary to build procurement strategies. Some companies utilize procurement software, supply chain management software, order tracking software or vendor management software in order to help their procurement staff remain organized and monitor the success of their strategies.
Tactical buyers that intend to switch to a more strategic approach must be able to justify these investments in order to keep their new systems in place. To do this, companies can track numerous KPIs to confirm that their new approach is working efficiently and achieving cost savings. ProcurementIQ has gathered a list of KPIs for companies considering a transition to strategic sourcing.
1. Procurement Operating Costs as a Percentage of Managed Spend
Calculation: Operating costs/managed spend
Definition: Operating costs entail the personnel costs, office space, training and other resources necessary to running a procurement department, whereas managed spend accounts for the portion of addressable spend for which savings have been optimized.
Implication: Higher procurement operating costs as a percentage of managed spend indicate lower ROI on procurement spending. Conversely, lower procurement operating costs as a percentage of managed spend indicate higher ROI on procurement spending.
2. Procurement ROI
Calculation: Annual cost savings/annual cost of procurement
Definition: Annual cost savings refers to the difference in contract values from one year to the next and takes into account whether the volume of goods or services in each contract has changed. The total cost of procurement encompasses the operating costs mentioned earlier, as well as non-operating costs (e.g. interest expenses on loans).
Implication: High procurement ROI indicates a highly effective procurement department. Lower procurement ROI indicates buyers may be leaving money on the table and can improve supply management to increase cost savings.
3. Purchase Dollars Spent per Active Supplier
Calculation: Purchase dollars/number of active suppliers
Definition: Purchase dollars refers to any money spent by the procurement department on goods and services, whereas the number of active suppliers refers to the total number of suppliers the company currently relies on to supply these goods and services.
Implication: Higher dollar amount indicates higher vendor consolidation, which may reduce cost redundancy, increase productivity and lift purchasing power. Conversely, lower dollar amount indicates higher vendor fragmentation, which may lower productivity and hamper buyers’ purchasing power by limiting their ability to bargain for volume discounts.
4. Realized Savings as a Percentage of Identified Savings
Calculation: Actual savings/projected savings
Definition: Market intelligence and other research can help buyers determine a reasonable estimate of potential savings the company can expect. Once a contract has been finalized, buyers should consider how much they actually saved in comparison to their target, or projected, savings.
Implication: Higher percentage indicates buyers are closer to achieving projected savings, so implemented procurement strategies are effective. Lower percentage indicates buyers have room to achieve more savings, so buyers should evaluate and change procurement strategies to increase the percentage.
5. Purchase Dollars as a Percentage of Sales Dollars
Calculation: Purchase dollars/sales dollars
Definition: While purchase dollars have already been defined, sales dollars refer to the proceeds acquired from the selling of goods or services.
Implication: Higher percentage indicates a threat to profitability and signals room for improvement in the way of reduced purchase dollars. Lower percentage indicates a more sustainable approach that supports profitability.
By Kimberly Bucci
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