Procurement professionals know that the devil's in the details. To stay ahead of the curve, you need data-driven insights that reveal hidden opportunities and challenges. In other words, you need procurement KPIs. 

By tracking key performance indicators (KPIs), you can identify areas for improvement, optimize costs, enhance supplier relationships, and ultimately drive greater value from your procurement process. 

This guide explores key procurement KPIs to enhance visibility and operational insight within your business, as well as how Zip can optimize reporting, approvals, and cycle times at your organization.

What are procurement KPIs?

Procurement KPIs are quantifiable metrics that provide insights into the effectiveness and efficiency of a company's purchasing and sourcing activities. They help procurement professionals measure performance, improve processes, and make informed decisions.

By tracking procurement KPIs, organizations can gain a deeper understanding of factors like:

• Supplier performance: Evaluate supplier delivery times, quality levels, and compliance with contractual obligations.
• Budget and spending: Analyze spending patterns, identify overspending, and negotiate better prices with suppliers.
• Inventory levels: Monitor inventory turnover rates, excess stock levels, and obsolescence costs.
• Procurement initiatives: Track the results of initiatives like supplier consolidation, reverse auctions, or e-procurement implementation.
• Risk management: Assess supplier financial stability, geopolitical risks, and potential disruptions in the supply chain. A data-driven approach helps companies optimize costs, mitigate procurement risks, and ensure procurement processes are aligned with strategic goals.

Procurement KPIs can be categorized into three key areas: cost, delivery, and quality. By tracking KPIs within these categories, you can gain a comprehensive view of your procurement performance and discover areas ripe for optimization.

Cost KPIs

Cost KPIs give you insights into the financial performance of your procurement activities. By tracking cost KPIs, financial controllers can find opportunities to reduce spending, optimize spend management, and improve profitability.

1. Total cost of ownership (TCO)

Measures: All associated costs of an item

Total cost of ownership (TCO) is a key aspect to consider when evaluating and optimizing your procurement costs. TCO takes into account not only the upfront costs of an item but all associated costs during the life cycle of that item, like: 

• Installation
• Maintenance
• Resource consumption
• Cost avoidance strategies
• Repairs
• Disposal

By considering all associated costs—not just the initial purchase price—businesses can make informed decisions about which suppliers to work with. This helps ensure their investments pay off in the long run.

2. Cost per invoice and PO

Measures: Average cost spent per invoice and purchase order, including direct and indirect labor costs, external services, technology costs, and paper costs 

By analyzing cost per invoice and purchase order (PO), organizations can pinpoint where costs are unnecessarily high and take steps to reduce them. For example, if the cost per invoice is consistently higher for a particular supplier or product category, it may indicate inefficiencies in the purchasing process, like excessive paperwork or manual data entry. 

Tracking cost per PO can also help identify opportunities for consolidating purchases and negotiating better terms with suppliers. Organizations can determine whether it’s more cost-effective to place larger, less frequent orders or smaller, more frequent orders.

3. Price competitiveness

Measures: Company spend compared to industry averages

Tracking price competitiveness can help ensure you get the best possible value for your purchases. By comparing the prices offered by different suppliers for the same products or services, organizations can:

• Uncover cost-saving opportunities and negotiate better terms 
• Avoid overpaying for goods and services
• Ensure procurement decisions are based on objective data rather than subjective factors

Analyzing price competitiveness can also provide insights into market trends and supplier behavior. By identifying suppliers that consistently offer lower prices, organizations can gain a better understanding of the competitive landscape and adjust their procurement strategies accordingly.

4. Procurement return on investment (ROI)

Measures: Financial benefits gains (or loses) relative to the cost of procurement 

Procurement return on investment calculates the financial benefit gained from procurement activities relative to its cost, allowing organizations to identify any potential opportunity cost associated with not properly conducting software procurement activities. 

Having accurate ROI data helps companies determine whether or not they're making the right investments in purchasing technology, services, and other products related to procurement operations.

5. Spend under management

Measures: The total value of purchases a company can directly influence or control

Measuring spend under management is important for organizations striving for maximum efficiency when it comes to procurement processes. Calculating how much of an organization's total expenditure is actively managed allows them to measure productivity levels across departments, enabling them to make smarter decisions moving forward. 

Establish benchmarks that help you compare your current performance to past results. This can reveal areas where you can optimize your spending and increase profits. By tracking these improvements over time, you'll see a bigger return on your procurement investments.

6. Spend analysis

Measures: The amount of money allocated for goods and services

Examining spend insights and analytics helps you gain insights into purchasing patterns, identify cost-saving opportunities, and optimize procurement strategies. By analyzing historical and current spending information, organizations can answer crucial questions like:

• What are we spending money on?
• Who are we spending money with?
• Are we getting value for our money?
• Are there opportunities to consolidate purchases or negotiate better terms with suppliers?  

Spend analysis involves collecting, cleaning, classifying, and analyzing spending data from various sources, including invoices, purchase orders, and contracts. The resulting insights can be used to inform decision-making, improve supplier relationships, and drive greater value from procurement activities.

Delivery KPIs

Delivery KPIs are procurement metrics that measure the timeliness, accuracy, and quality of product or service deliveries. By tracking delivery KPIs, businesses can ensure their supply chain is efficient and effective, meeting the needs of customers and minimizing disruptions.

7. Purchase order cycle time

Measures: Time it takes to process orders from start to finish

Purchase order cycle time is a key metric that measures the efficiency of the procurement process from the time a purchase requisition is received to when the purchase order is issued to the supplier. A shorter cycle time indicates a more streamlined and efficient procurement process, which can lead to improved cash flow, reduced inventory costs, and faster delivery of goods and services.

By tracking purchase order cycle time, organizations can identify bottlenecks in the procurement process and take steps to eliminate them. This may involve:

• Automating manual tasks
• Implementing a procurement orchestration solution
• Streamlining approval processes
• Improving communication with suppliers 

Reducing purchase order cycle time can also help improve customer satisfaction by ensuring orders are processed and fulfilled more quickly.

Find out how Patreon was able to reduce cycle times by 50% and increase spend under management by 300% with Zip. Learn more

8. Supplier lead time

Measures: Supplier production and shipping processing times

Supplier lead time is one way for businesses to assess how long it will take them to receive items from vendors or suppliers after placing an order. This procurement metric looks at the amount of time necessary for both production and shipping, allowing businesses to make sure all deadlines are met reliably without incurring potential penalties or damages from late deliveries. 

With accurate supplier lead time estimations in place, companies can better plan their inventory levels and take steps toward streamlining operations via better forecasting abilities.

9. On-time delivery rate

Measures: The percentage of orders delivered on-time

On-time delivery rate measures the percentage of orders delivered within the specified timeframe. This metric is a direct indicator of supplier performance and its impact on the overall supply chain. A high on-time delivery rate is essential for maintaining customer satisfaction, avoiding disruptions, and ensuring operations run smoothly.

Tracking on-time delivery rates allows companies to gain insight into their own procurement process while better monitoring partners who may be involved earlier in production cycles.  

10. Rate of emergency purchases

Measures: How often a company makes unplanned or urgent purchases 

Rate of emergency purchases measures the frequency with which organizations make unplanned or urgent purchases due to unforeseen circumstances. A high rate of emergency purchases can indicate inefficiencies in the procurement process, supply chain disruptions, or poor inventory management.

By tracking the rate of emergency purchases, organizations can recognize where their procurement strategy is failing to meet demand. They can then use this information to improve inventory planning, strengthen supplier relationships, and develop contingency plans to mitigate the impact of unexpected events. 

Analyzing the reasons for emergency purchases can also help identify root causes and correct course.

Quality KPIs

Quality KPIs measure the quality of goods and services procured by an organization. Businesses need to track these metrics to ensure they receive products and services that meet their requirements, improve customer satisfaction, and reduce costs associated with defects and rework. 

11. Supplier performance index (SPI)

Measures: Factors influencing vendor performance

Supplier performance index (SPI) is a comprehensive metric that measures a supplier’s overall performance across various dimensions, including: 

• Quality
• Delivery
• Cost
• Responsiveness

SPI typically involves assigning weights to each performance criterion based on their importance to the organization, then calculating a weighted average score to assess the supplier's overall performance. A high SPI indicates a supplier that consistently delivers high-quality products or services on time at a competitive price and is responsive to customer needs.

For example, let’s say a manufacturing company is evaluating two suppliers for a critical component. They assign weights to various performance criteria based on their importance:

• Quality: 40%
• Delivery: 30%
• Cost: 20%
• Responsiveness: 10%

They then rate each supplier on a scale of 1-5 for each criterion:

To calculate the SPI, they multiply each rating by its corresponding weight, sum the products, and divide by the total weight:

• Supplier A: (4 * 0.4) + (3 * 0.3) + (4 * 0.2) + (5 * 0.1) = 3.9
• Supplier B: (3 * 0.4) + (5 * 0.3) + (3 * 0.2) + (4 * 0.1) = 3.7

Based on the SPI, Supplier A has a higher overall performance, consistently delivering higher quality products, meeting delivery deadlines, offering competitive pricing, and providing excellent customer service.

​​By tracking SPI, businesses can find top-performing suppliers, pinpoint opportunities for improvement, and make informed decisions about supplier relationships. 

12. Product quality

Measures: The percentage of inventory deemed acceptable upon delivery

Product quality rate measures the percentage of products or services that meet or exceed specified quality standards. It’s key for figuring out how well suppliers are doing and how that affects how customers feel about the company. 

By tracking product quality rate, organizations can identify suppliers that consistently deliver high-quality products or services and those that require improvement. This information can be used to negotiate better terms with suppliers and reduce the risk of quality-related issues.

13. Supplier diversity and sustainable sourcing

Measures: Benchmarks set around supplier diversity and sustainability

Supplier diversity and sustainable sourcing are two important considerations for organizations seeking to improve their procurement practices. 

Supplier diversity refers to the practice of sourcing goods and services from a variety of suppliers, including those owned by minority groups, women, veterans, and people with disabilities. One way to quantify supplier diversity is to measure the percentage of spend with diverse suppliers. 

Sustainable sourcing, on the other hand, involves sourcing products and services in a way that minimizes environmental impact and supports social and economic justice. It can be measured by tracking metrics like carbon emissions, waste reduction, and fair labor practices.

By choosing suppliers who reflect the world around us and sourcing materials in a way that's good for the planet, companies can help make the economy fairer and greener. Plus, they'll get perks like coming up with new ideas, being better prepared for problems, and having a stronger brand.

14. Contract compliance

Measures: How well businesses follow the terms of their contracts

Contract compliance shows how consistently businesses adhere to established contracts and agreements related to their purchases or procurements. Checking compliance rate with these standards is paramount when managing supply chains. 

This procurement KPI allows firms to uncover any discrepancies, quickly ensuring they remain compliant with contracting regulations while also mitigating risks. Companies may opt for specialized tools that provide automated contract reviews to save time and money on efforts associated with manually scrubbing through contract details.

15. Supplier concentration

Measures: How heavily a company relies on a small number of suppliers

Supplier concentration is another useful metric for effective procurement management. This metric looks at how heavily an organization relies on certain suppliers for their goods and services. If too many resources are devoted to a single supplier, it could create potential problems down the line that affect profitability and customer satisfaction. 

On the other hand, if too few resources are devoted to any one supplier, then there will be less bargaining power when it comes time to negotiate new contracts or renew existing ones. Businesses should strive to find the right balance to ensure they’re getting the best value from their supplier relationships while still reaching optimal levels of efficiency and productivity.

16. First-time match rate

Measures: How often invoices match purchase orders and receipts on the first attempt

First-time match rate is a helpful metric for checking how well your procurement team is doing at getting things right the first time. This metric tracks whether invoices match purchase orders and receipts on the first attempt—a great way to measure the accuracy and efficiency of your processes.

By taking proactive measures to reduce invoice errors, companies can make it easier for buyers handling large volumes of incoming invoices. With these improved rates come improved accuracy throughout all stages of purchase transactions—a testament to any business eager to minimize embedded risk in its procurement operations

Why should you track procurement metrics?

The importance of procurement metrics is evidenced by the fact that many large organizations have already adopted various methods for tracking and measuring their purchases. 

Here are some of the key reasons to track procurement metrics:

• Identify cost savings: Pinpoint areas where you can reduce spending and improve profitability.
• Optimize supplier relationships: Evaluate supplier performance and identify opportunities for better collaboration.
• Enhance risk management: Monitor metrics to identify potential risks, like delivery delays or vendor concentration, and take proactive measures to mitigate them.
• Improve efficiency: Track metrics to streamline processes and reduce lead times.
• Demonstrate value: Use metrics to showcase the contribution of procurement to the overall business.
• Make data-driven decisions: Base decisions on factual data rather than assumptions or gut feelings.
• Benchmark performance: Compare your metrics to industry standards or competitors and discover opportunities to improve.
• Align with business goals: Ensure procurement activities are aligned with the overall strategic objectives of the organization.

Optimize procurement KPIs with Zip

Zip is the premier procurement orchestration platform that streamlines the entire procurement process, from request to payment. Our AI-powered platform automates workflows, simplifies approvals, and provides real-time visibility into spending. 

With Zip, you can easily track procurement KPIs and metrics to make informed decisions, enhance supplier performance, and achieve your business goals. To learn more about how Zip can transform your procurement, schedule a demo today.