Procurement Key Performance Indicators

What are procurement KPIs?

Procurement Key Performance Indicators, or KPIs, are measurable values that indicate how well procurement activities are performing against specific objectives. These KPIs serve as a critical tool for monitoring and evaluating the efficiency and effectiveness of an organization’s procurement processes.

By tracking KPIs, businesses can gain valuable insights into the different aspects of procurement, from supplier performance and contract compliance, right through to cost control and process optimization.

Procurement KPIs ultimately help to deliver continuous improvement, driving stronger vendor relationships, enhancing decision-making, and ultimately contributing to the long-term success and sustainability of your organization.

Types of procurement KPIs

Cost-based procurement KPIs

Cost-based key performance indicators are critical metrics that are used to assess the effectiveness of an organization’s procurement strategies in terms of cost management. Some examples of cost-based procurement KPIs include:

Cost savings

A direct measure of how well the procurement function is able to reduce expenses over a specific time frame. This KPI could be even more specific and framed as Supplier Negotiation Savings, measuring the amount saved by negotiating better pricing or contract terms with suppliers. This could be through the likes of price reductions, volume discounts, or improved payment terms.

An example cost-saving KPI for procurement teams may therefore be:

• KPI: Percentage of total spend saved through supplier negotiations
• KPI Target: Save 10% of total spend on negotiated supplier contracts within a fiscal year

Cost reduction

This measures how effectively the procurement function is able to reduce the cost of goods and services over a defined period. It looks beyond negotiation savings and includes a broader range of activities that lead to a decrease in total procurement spend.

This may involve lowering unit costs through negotiations, supplier consolidation, or where relevant, bulk purchasing. It may also include improving operational efficiencies by streamlining procurement processes, reducing waste, or leveraging economies of scale – and therefore increasing purchasing power.

An example procurement KPI focused on cost reduction could be:

• KPI: Total spend reduction
• KPI Target: Achieve a 5-10% reduction in total spend within one fiscal year

Purchase Price Variance (PPV)

Purchase price variance, or PPV, is another financial metric that is often used in procurement and supply chain management to assess the difference between the expected cost of an item – the baseline cost – and the actual purchase cost. In other words, it measures the gap between what an organization planned on spending for a particular product or service, and what they actually paid.

Ultimately, it can be an effective way to assess whether cost-saving targets have been met. By monitoring it over time across different suppliers or product categories, you can identify patterns of cost fluctuations, allowing you to focus on improving negotiations or managing pricing inconsistencies.

An example PPV KPI for procurement teams would be:

• KPI: Purchase Price Variance (PPV)
• KPI Target: Achieve a PPV of -10%

Procurement ROI

This gauges the effectiveness of procurement activities in terms of the value generated for the business compared to the costs incurred. In other words, it demonstrates the value procurement is generating – cost savings, efficiencies and other benefits – relative to the costs involved in running the procurement function.

An example key performance indicator focused on procurement ROI would be:

• KPI: Cost savings return on investment
• KPI Target: Achieve 25% ROI

Efficiency-based procurement KPIs

KPIs focused on efficiency are crucial in procurement as they help measure and improve the effectiveness of the procurement process and ensure that resources are being used optimally. They can also be used to identify bottlenecks, for example delays in approvals processes, and reduce wasted spend.

Procurement cycle time

This measures the total time it takes to complete a procurement process, from identifying the need, to receiving the goods – or in the context of IT procurement, implementing the software.

An example KPI to measure procurement cycle times could be:

• KPI: Software procurement cycle time
• KPI Target: Achieve a procurement cycle time of 20 days for tactical software purchases

Time to contract renewal

A key performance indicator focused on time to contract renewal would measure the time taken to complete the process of renewing a contract.

An example KPI could therefore be:

• KPI: Time to contract renewal
• KPI Target: Renew existing contracts within 15 days.

Supplier KPIs

Measuring supplier performance is critical for ensuring the supplier – or software vendor – is delivering value, meeting service levels, and aligning with your business needs. The following example of procurement KPIs can be used to help assess a supplier’s effectiveness.

Service availability

The percentage of time the software is available and operational, excluding planned downtime. Knowing this metric, particularly for highly utilized platforms, is important as it could impact your decision on whether to renew the particular contract. You should also be thinking about requesting a clause that allows for an early exit should the supplier fail to meet the agreed service levels.

See a full list of contract clauses that can be negotiated.

An example KPI may therefore be:

• KPI: Service availability/uptime
• KPI Target: 99.9% uptime (This may depend on the agreements you have with individual SaaS providers)

Percentage of purchases from approved suppliers

With maverick spending and shadow IT a huge issue for many organizations, this can be a useful KPI to track as it measures the proportion of procurement activities that involve approved suppliers. Low percentage levels may indicate a need for procurement teams to update supplier approval processes, implement stronger purchase controls, and communicate the impact of non-compliance as part of a wider change management strategy.

An example KPI could therefore be:

KPI: Percentage of purchases from approved suppliers

KPI Target: Ensure at least 95% of purchases are from approved suppliers

Guidance for choosing the right KPIs for your organization

Choosing the right KPIs for your procurement team is critical to ensuring that procurement as a function is adding value, improving efficiency, and aligning with broader organizational objectives. The right KPIs will specifically help to measure procurement performance, enhance decision-making, and identify areas for improvement.

Here are some specific things that should be taken into consideration when selecting your procurement KPIs:

Align with your core procurement objectives

Start by identifying the core goals of the procurement function, whether that be reducing costs, improving supplier relationships, ensuring compliance, or increasing efficiency. The KPIs you select should directly support those priorities.

Track both operational and strategic procurement KPIs

By tracking both operational and strategic KPIs, you will be equipped to measure both the efficiency of your day-to-day procurement operations, as well as the long-term strategic impact of procurement decisions.

This is important as it not only allows you to optimize routine tasks, activities, and processes, but it also ensures that any decisions contribute to the organization’s broader strategic goals over time.

Ensure KPIs are measurable and data-driven

As with any KPI, procurement key performance indicators should be based on reliable, easy-to-measure data. These KPIs will need to provide insights that can be tracked consistently over time in order to monitor progress and identify trends.

Access the 11 procurement metrics that all top-performing procurement leaders are tracking

Include KPIs that drive actionable insights

Ideally, any KPI you choose to measure should be able to provide insights that drive actionable change. After all, if a KPI reveals inefficiencies or problems, the procurement team should be able to take steps to address them.

As an example, monitoring supplier performance as a KPI can reveal which suppliers consistently meet or fall short of expectations. This insight enables the procurement team to make informed decisions about renegotiating contracts, seeking alternative suppliers, or addressing performance issues, leading to improved supply chain efficiency.

Consider KPIs that are relevant to different stakeholders

Different teams and stakeholders across your company will be interested in different aspects of procurement performance. Finance, for example, will have a particular interest in areas such as cost control, budget compliance, and cash flow, whereas IT will typically care more about supplier performance and contract compliance.

Ensuring that at least some of the procurement metrics and KPIs you’re tracking align with the interests of key stakeholders can be an effective way to demonstrate procurement’s value across the organization.

Focus on 5-10 procurement KPIs

While the optimal number of procurement KPIs depends on a number of factors including the size of the organization, the complexity of procurement activities, and the specific goals of the procurement function, a general guideline is to keep the number of KPIs you’re tracking manageable.

A typical procurement team may therefore want to consider tracking between five and ten key performance indicators, to avoid overwhelming the team.

Tracking KPIs and proving procurement’s value with Vertice

Procurement KPIs are only as good as the data they are based on, meaning that to effectively track these KPIs, organizations need access to accurate procurement information. In other words, you need a tool that can provide real-time visibility and actionable insights to drive informed decision-making.

A tool such as Vertice.

As a Procurement Orchestration Platform, Vertice can specifically provide you with visibility of your spend, utilization rates, and workflow efficiencies, enabling you to optimize processes, reduce costs, and prove procurement’s value within your organization.

See for yourself how Vertice can help you simplify your procurement by taking a self-guided tour of the platform.

Alternatively, have a read of how we helped one company achieve an average of 30% savings on their software contracts, while accelerating their procurement cycles by as much as 55%.