Traditionally, procurement department was considered as a back-office function and was limited to cost savings. In today’s competitive business world, procurement process is more than just meant for purchasing products and services from vendors. The procurement teams need to handle many tasks that affect the bottom line of the business, such as sourcing and onboarding the right vendors, managing contracts, and ensuring compliance across the supply chain process. To redefine themselves as a source of value creation, they are constantly looking for ways to improve the efficiency of the purchasing process. KPI (Key Performance Indicator) is one such strategy that helps businesses identify bottlenecks and track a set of metrics to evaluate the efficiency of the process and make the right decisions to enhance productivity.
Procurement KPIs vary from business to business and therefore you have to research and identify which KPIs are applicable to your organization. In this blog, we have discussed a few most common KPIs for the purchase order process.
PO Cycle Time
Purchase order cycle time is not the total time spent on a purchase order, from PO creation to approval, invoice generation, and final payment. PO cycle KPI only focuses on purchase order management excluding the product delivery process. Usually, this KPI is measured either in hours or days. A higher cycle time indicates that your procurement team is ineffective in managing the purchasing process. This metric comes in handy when sourcing the right suppliers for urgent orders.
Cost of Purchase Order
Cost is also a major factor in the purchase order process and therefore we have included it in the KPIs list. This KPI estimates the average cost of processing a purchase order, from PO creation to approval, invoice generation, and payments. Since the factors influencing the cost of the PO vary from firm to firm based on size and industry, there is no standard formula for calculating this metric. Usually, firms calculate the cost by considering the time spent and the number of employees directly or indirectly involved in the process. Therefore the firms that are relying on manual processes spend more when compared to the ones that have implemented automation. By consistently tracking the purchase order costs, you can analyze the unwanted expenses thereby reduces the costs and improves the efficiency of the procure-to-pay cycle.
PO Processing Time and Budget
Time and budget are the most valuable assets for every organization. Procurement managers have to track this metric to ensure every task in the purchasing process is completed within the specified time and budget. By tracking this KPI, businesses can identify the circumstances under which the time and budget constraints are not met. This helps them to identify the loopholes in the procurement process and implement effective strategies to eliminate those and improve the process.
Tracking PO accuracy is imperative for the procurement teams as it helps them ensure the suppliers are delivering the right goods at the specified timeline mentioned in the purchase order. With this KPI, you can measure operational excellence which can impact the bottom line of the business. Usually, this metric is determined by the percentage of POs with errors (pricing, quantity, timeline, or quality) compared to the total number of purchase orders. This KPI will help you identify the reliable vendors that ensure accuracy in the PO process for long-term relationships.
The Bottom Line
The key performance indicators discussed above help you grab tremendous opportunities to improve the productivity of your purchase order process. With the KPIs, businesses can identify the pitfalls of the procurement process, analyze the performance of procurement teams and estimate the time and budget that gets wasted with ineffective processes. This helps the procurement teams to streamline the purchase order process effectively by allocating and spending time, money, and workforce efficiently to enhance the overall productivity of the process.