Key Performance Indicators: The Good, The Bad, The Different

KPI

I can even hear you thinking… “Not those! Not again!”… A sensitive subject, when it comes to your OWN performance measurement. Let’s set the rules now: this time we talk about THEM, not US.

According to Investopedia: “Key performance indicators (KPI) are a set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their strategic and operational goals. KPIs vary between companies and industries, depending on their priorities or performance criteria.” StrategicContact, talking about KPIs of a call centre, say that “it’s not just about productivity any more”.

The most popular KPIs that are traditionally assigned with procurement, are as follows:

  1. Total Cost Savings;
  2. Quality (IF part of OTIF, 6sigma numbers in Defects Per Unit or Defects per X opportunities);
  3. Delivery (OT part of OTIF);
  4. Cost avoidance;
  5. Implemented cost reduction savings (to keep it short, it shows how successful is the project management or budget implementation);
  6. Procurement Cycle Time (time to market, P2P cycle/cost and similar);
  7. Percentage of suppliers accounting for 80% of the spend;
  8. ROI;
  9. Managed spend versus Maverick spend;
  10. Contract compliance.

Different companies might calculate and interpret them differently – it all depends on the overall company’s goals. Some companies measure some additional factors: Inventory KPI’s (turnover ratio), Employee Learning & Growth KPI’s… The most important part is that everyone in the company is aligned and understand what and how and why they measure.

Available primary data quality is also a vital factor, but this post is not about that.

Like StrategicContact, I also think it is not only about productivity, hard cash. Those are very important, no arguing about that. However, they are consequences of the way people work, the behaviour (theirs, not ours, remember?). That is especially important in current business world, where the change is inevitable.

While creating reporting systems for procurement department and / or function, I have additional categorization:

  1. Efficiency (or productivity – everything, that is mentioned above and is relative for the business);
  2. Discipline;
  3. Accuracy.

Discipline part is very important, when you are trying to implement any change. I have heard sayings “no PO – no Pay”, I have implemented supplier communication groups (e-mail distribution groups), which were helping to implement internal policies with help of external influence. Sometimes, this calls for some resistance from other departments, because in some occasions it shifts the problem from procurement to finance… Having proper KPIs and reporting system in place, allows you to keep up with the T part of SMART requirements: timeliness.

Example: let’s say, your database on item level includes information on minimum delivery time. Which means, you know, that from the moment PO is issued to the time items can be delivered, there cannot be less than 10 days (physically impossible). “No PO – no Pay” policy would pick up only the cases where the items arrived, payment term has come to an end and there is no PO on the system even then, many times more than 40 days later. Consequences, that will bring you negative financial impact (wasted working time of finance, procurement department, non-compliance, etc.). What about all of the POs, that were raised any time before the day 10, but after day 0 (when they were supposed to be raised)? You would never pick up those. If the change you are trying to implement says, that you need to raise a PO as an official order to a supplier. Discipline KPI might pick up all POs, where the difference between PO date and “date required” or “delivery date” is shorter, than minimum possible delivery time. It will definitely pick up all POs, which are raised at the time of receiving goods (if you do not yet have policy of not accepting goods, which do not have PO). Overall, you need to be able to get the alerts before non-compliance turns into costs and in such a way, that you would be able to correct the behaviour that causes all the troubles.

Accuracy is something, that should keep your system set up in tact. Take the example above. If you have minimum delivery times set up, but you notice, that recently, quantity of faster deliveries, especially with one supplier, goes up by 50%. That might trigger your attention to the correctness of system set up. It might indicate, that the person, raising the POs, started doing the job worse, that workload suddenly got too big. But it also might mean, that the supplier opened a warehouse closer to the delivery point and always keeps safety stock in place to serve better. That would require updating the buyer’s system data. If that was not done, your accuracy KPIs will immediately show that.

To sum up – if the reporting and KPI system is set up properly, you will be able timely pick up “the different” and, after asking the right people the right questions, you can decide if it is “the good” or “the bad”.

Thank you for reading! Do you do it differently? Please share in the comments below!

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Key Performance Indicators: The Good, The Bad, The Different

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