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Here you will find essential KPIs that help you to improve your procurement
processes. Using some of these KPIs, may help you establish strategies to
save on your company costs.

This KPI measures the percentage of managed spend compared to the total spend
when buying external products and services for the company. In organizations with
centralized procurement, managed spend can be calculated as the total of all spend
run by the organization.
How it’s calculated:

The goal of this KPI is to have more spend follow standard procedures, thereby
saving on costs.

For indirect spend, cost savings should be at the top of your agenda since
discontinuing supply will not be considered critical to business.
Cost savings can be achieved in multiple ways:
 Generating higher competition among suppliers. By using benchmarking
and comparing supplier participation rate results.
 Establishing bid rules. It is common to use the three-bid rule – if the request
has less than three bids, it has to be run again. You can measure how many
requests have three, four or more bids. The goal is to increase the % of
higher numbers of bids.
 Establishing detailed rules and increasing the transparency of indirect
purchases to lower maverick spend.

Finding the way to save on costs for direct purchases is essential for every
procurement organization. However, they are not easily achievable since buying
operations are usually highly optimized. There may be hidden risks that can harm
delivery or quality and affect supply continuity.

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  Find external suppliers for products or materials.
Example: lot of companies look for cheaper products or materials from
Asian countries. In this case you can measure the % of strategic supply from
Asian countries. This should be implemented step-by-step and progress of
quality, delivery and % of overall spend should be followed. Slowly increase
the percentage if no quality or delivery issues arise.
 Invest extra resources or even buy the strategic supplier company.
This should be considered a long-term investment and KPIs should be
developed for each case separately since they are unique.
 Look for replacement products or services. Measure the % of replaced
products or services.

Focus on making sure the price quoted is the price paid. This can reduce cases of
“overpaying” the supplier. Usually indirect spend, primarily services, have lower
compliance rates.
A clear policy with agreements and penalties helps to increase the compliance rate
and leads to more accurate bidding. The rogue spend will decrease when suppliers
know that they are being monitored. Ultimately this lowers the number of extra
paid prices.
Indicators to follow
 Percentage of disputed invoices to total invoices.
 Calculate the total difference for ratio of price paid to price quoted.
The goal of both KPIs is to raise compliance.

Direct savings can be received by reducing maverick costs, which may be up to

20%, and corruption. Both may be difficult to measure. However, the results are
easy to notice once processes become transparent. Running RFPs via mail,
especially outside the procurement department elevates the risk of paying
maverick costs.
Using special procurement software can easily reduce maverick costs.

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Indicators to follow:
 Follow the number of requests run outside the procurement department
via mail. Special solutions like DeltaBid eliminate the risk of maverick spend.
Aim towards decreasing the number.
 Improve processes and use benchmarking to identify savings.

A high percentage of payable invoices without purchase orders is an indication of

low competition amongst suppliers, which usually leads to higher product or
service costs.
How to reduce:
Follow the percentage of purchase orders payable without purchase orders for a
period of time. Use benchmarking to follow the differences in costs. Goal: reduce
the percentage.
NB! Focusing only on immediate cost savings can lead to low quality or delivery and
can interrupt continuity.

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Inventory reduction leads to less stock, which leads to zero or low financing on
inventory and zero or no mark-up. This results in cost savings and lower
operational costs.
Indicators to follow:
 Setting upper and lower norms for each strategic stocked product or
material. The KPI should follow the norms on a daily basis and each deviance
needs special treatment.
 Exceeding the upper level increases operational costs. Below the lower end
continuity of supply is threatened, which might lead to extra costs.
 Minimize stocked indirect materials, measured by capacity etc. This
improves work capital and lowers inventory management costs.
 Lower load of stock in inventory leads to more space for other products and
lower inventory management costs.

If your company has interruptions in continuity due to problems, such as a certain

geographic locations or industry specific problems, there may be ways to
commute these interruptions, which usually then leads to cost savings.
Interruptions in continuity are usually associated with high costs, so your first goal
is to avoid them. If that’s not possible, then commute the interruptions.
Indicators to follow:
 Follow the number of interruptions. Analyze the results and look for ways to
improve.
 Prepare a special spare in case of an emergency. Analyze how it helps to
overcome the problem.

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Improving the quality of direct supply helps lower the cost of the supply. This KPI
quantifies the purchase quality of the procurement branch.
Indicators to follow:
Agree on special metrics that reveal the quality of direct supply. Reflect the
percentage, laboratory experiments, etc. and follow them on daily basis.
Tip: often you cannot negotiate lower prices, but instead try to agree on higher
quality within the established price. This will lead to indirect cost savings.

If you are dealing with raw materials and have an expiration problem, such as the
food industry, agriculture, chemistry, and IT, then you may find ways for cost
savings through lowering the rate of expiring products by better management.
Indicators to follow:
 The quantity and number of expiring products.
Goal: lower the number. This can be done through better inventory
management, following norms for stocked quantities etc.

In some industries, cost savings can be achieved by improving the on-time delivery
or products or services. For example: early delivery increases operational costs and
late delivery ends in high waiting costs.
It plays a significant role in industries where the strategic supply is usually not
stored in inventory (example: in construction).
Indicators to follow
 You can follow the behavior of the suppliers, categories, etc.
Goal: improve the strategic supply’s on-time delivery.
 If your strategic suppliers have problems related to on-time delivery, you
should find ways to improve their behavior, which will then lead to cost
savings.

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Higher quantity of delivered items increases operational costs and might result in
unplanned inventory storage.
Lower quantity might result in continuity interruptions and higher operational
costs since you have to source faster than planned for new stock.
Indicators to follow:
 Follow the quantity of delivered items. Goal: reduce errors in delivery
quantity.
 Establish and use special agreements and penalties. Goal: follow the results
using benchmarking.

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