Top 20 Spend Management KPIs Global Businesses Should be Tracking
In the era of data-driven decisions, companies around the globe are focusing more on key performance indicators (KPIs) to analyze, control, and improve their spend management processes. This article explores the top 20 spend management KPIs that global businesses should track to optimize their procurement functions and realize cost savings.
Why Cost Avoidance Is Just as Important as Increasing Revenues for Profitability
Cost avoidance, sometimes referred to as “soft savings” is just as important as increasing revenues when it comes to profitability. By reducing extra costs and avoiding unnecessary expenses, businesses can increase their profits. Cost avoidance is a way of looking at how to reduce future costs without sacrificing the quality of the product or service. It involves examining existing expenditures and determining where savings can be made without affecting the customer experience or compromising on quality.
For instance, businesses can implement process automation and streamline their purchasing processes. This reduces the time and effort required to complete a purchase, resulting in cost savings. Additionally, businesses can negotiate better terms with suppliers and vendors to get lower prices on raw materials and other items they often buy, with a complete list of variables that can impact the actual costs of orders.
1. Spend Under Management (SUM) KPI
Spend Under Management (SUM) is a Key Performance Indicator for businesses striving for efficient spend management. It quantifies the proportion of the total spend that is effectively managed by the procurement function.
Formula for Calculating Spend Under Management
To calculate SUM, divide the total spend under management by the total spend of the company and multiply by 100.
Spend Under Management = (Total spend under management / Total spend) x 100
Significance of the SUM KPI
A high SUM indicates effective management of company expenses. The procurement function, through strategic methods, has a firm control over a larger portion of the company’s expenditures. This can translate into better negotiation power, economies of scale, and reduced costs.
Lower SUM and its Implications
On the other hand, a low SUM may expose potential risks. It could imply that a significant part of the company’s expenses is not being effectively controlled. This may result in inefficiencies, unauthorized spending, and missed opportunities for savings.
Utilizing SUM for Procurement Strategy
Keeping track of SUM allows businesses to assess the performance of their procurement functions. It enables them to identify areas that need improvement and devise strategies to boost spend management controls and cost efficiency.
2. Cost Savings KPI
The Cost Savings Key Performance Indicator (KPI) holds a prominent position within the realm of spend management. This valuable metric signifies the amount of money that a business manages to save through effective implementation of various spend management strategies. These strategies could range from negotiating improved prices with suppliers to implementing processes that minimize waste.
Calculation of Cost Savings
Cost savings is calculated as the difference between total spend and actual spend, divided by the total spend, all multiplied by 100 to obtain the percentage of savings. This can be expressed as:
Cost savings = Expected spend – Actual spend) / Expected spend x 100
Importance of Cost Savings
A higher percentage in cost savings indicates the efficiency of the procurement department’s cost-saving efforts. These can range from successful price negotiations with suppliers to process improvements that reduce waste or enhance productivity.
Implications of Low Cost Savings
Conversely, lower cost savings could signify missed opportunities to save costs or inefficiencies in the procurement processes. It could potentially highlight areas where further negotiation or process improvements are needed.
Role of the Cost Savings KPI in Strategic Planning
Monitoring cost savings aids businesses in determining the effectiveness of their spend management strategies. It supports them in identifying successful cost-saving measures and recognizing areas that need further optimization. Ultimately, focusing on increasing cost savings can significantly improve a company’s bottom line and overall financial health.
3. Purchase Order Cycle Time KPI
The Purchase Order Cycle Time is an essential Key Performance Indicator (KPI) in the realm of procurement. This metric provides a gauge of the time required to issue and process a purchase order, which, in turn, offers insights into the efficiency of the company’s procurement process.
Formula for Calculating PO Cycle Time
The calculation of PO Cycle Time involves subtracting the date goods or services were received from the date the PO was issued and dividing by the number of POs issued:
PO Cycle Time = (Date PO issued – Date goods or services received) / Number of POs issued
Importance of PO Cycle Time KPI
A short PO cycle time suggests that a company’s procurement process is efficient and well-structured. This could translate into better relationships with suppliers, as orders are processed promptly.
Longer PO Cycle Time and Its Implications
However, a longer PO cycle time may indicate inefficiencies in the procurement process. This could result in delayed deliveries and potential disruptions in the company’s operations.
Utilizing PO Cycle Time for Procurement Strategy
By tracking PO Cycle Time, businesses can identify bottlenecks in their procurement process and implement measures to streamline order processing, thereby improving overall operational efficiency.
4. Spend By Category KPI
The Spend By Category KPI is a pivotal metric in procurement that provides a comprehensive understanding of a company’s financial distribution across distinct business categories. Whether it’s Information Technology (IT), marketing, facilities, human resources (HR), or any other business sector, this KPI offers valuable insight into the proportion of total spend allocated to each department.
Formula for Calculating Spend By Category
This KPI is calculated by dividing the spend in a specific category by the total spend.
Spend by Category = Spend in Category / Total Spend
Importance of Spend By Category KPI
By monitoring this KPI, a business can gain insights into where most of its expenditure goes, allowing for better budget planning and allocation.
High Spend in a Single Category and Its Implications
A high spend in a single category might indicate the need for cost reduction strategies within that sector or an opportunity to negotiate better deals with suppliers.
Utilizing Spend By Category for Procurement Strategy
Tracking Spend By Category helps businesses optimize their procurement strategies, identify potential areas for savings, and make informed decisions about budget allocation.
5. Spend By Supplier KPI
The Spend By Supplier KPI is a valuable metric that provides insight into the distribution of a company’s spend across its various suppliers. It allows procurement teams to understand how their expenditures are allocated among different preferred suppliers and assess their relationships, as well as understand trends in purchase price variance, average cost of an order by supplier and average orders over a period of time.
Formula for Calculating Spend By Supplier
This KPI is calculated by dividing the spend with a particular supplier by the total spend
Spend By Supplier = Spend with Supplier / Total Spend
Importance of Spend By Supplier KPI
Keeping track of Spend By Supplier helps companies manage their supplier relationships more effectively, enabling them to identify key suppliers and ensure strategic allocation of resources.
High Spend with a Single Supplier and Its Implications
A high spend with a single supplier might suggest over-dependence on that supplier, exposing the company to potential supply chain risks.
Utilizing Spend By Supplier for Procurement Strategy
Monitoring this KPI aids businesses in optimizing their supplier management strategy, negotiating better contracts, and reducing risk associated with supplier dependence.
6. Contract Compliance KPI
Contract compliance is crucial for ensuring that suppliers fulfill their contractual obligations, which directly impacts the company’s operational efficiency, cost control, and overall business performance. By monitoring contract compliance, organizations can mitigate risks, strengthen supplier relationships, and drive value creation.
Formula for Calculating Contract Compliance
The Contract Compliance rate is calculated as follows:
Contract Compliance Rate = (Number of Compliant Deliveries / Total Number of Deliveries) x 100
Importance of Contract Compliance KPI
A high contract compliance rate indicates that suppliers are delivering as per the agreed terms, which can result in smooth operations and fewer disputes.
Low Contract Compliance and Its Implications
On the contrary, a low contract compliance rate could signal potential issues with suppliers, which may disrupt operations and lead to additional costs.
Utilizing Contract Compliance for Procurement Strategy
By keeping an eye on this KPI, businesses can ensure their suppliers meet their contractual obligations and manage supplier relationships more effectively.
7. Supplier Lead Time KPI
Supplier Lead Time represents the duration between the moment an order is placed with a supplier and the subsequent delivery time of goods or completion of services. It encompasses the entire process, from order placement to receipt of the ordered items.
Formula for Calculating Supplier Lead Time
This is calculated as the sum of total order lead times divided by the total number of orders
Supplier Lead Time = Sum of Total Order Lead Times / Total Number of Orders
Importance of Supplier Lead Time KPI
A shorter supplier lead time is desirable as it implies quicker deliveries, less inventory holding costs, and reduced risk of stockouts.
Longer Supplier Lead Time and Its Implications
However, longer lead times could increase inventory costs, disrupt operations, and affect customer satisfaction.
Utilizing Supplier Lead Time for Procurement Strategy
Monitoring this KPI helps businesses manage their inventory more effectively, negotiate better lead times with suppliers, and improve their supply chain efficiency.
8. Savings Per Supplier KPI
The Savings Per Supplier KPI is a calculated metric that enables organizations to quantify the amount of money saved through negotiations or cost-saving measures implemented with specific vendors. It sheds light on the cost efficiencies achieved by optimizing vendor relationships and procurement strategies.
Formula for Calculating Savings Per Supplier
Savings per supplier is calculated as the baseline spend minus the actual spend:
Savings Per Supplier = Baseline Spend – Actual Spend
Importance of Savings Per Supplier KPI
This KPI allows companies to identify which vendors are providing the most cost-effective deals and contribute to significant annual cost savings.
Low Savings Per Vendor and Its Implications
Low savings per supplier might indicate the need for improved negotiation strategies or a review of the supplier’s contract.
Utilizing Savings Per Supplier for Procurement Strategy
By tracking this KPI, businesses can refine their supplier negotiations and pricing strategies to drive further savings and improve profitability.
9. Invoice Accuracy KPI
Invoice accuracy refers to the level of correctness and precision in the invoices received by a company. It assesses the extent to which invoices align with the agreed-upon terms and accurately reflect the goods or services provided. It assesses the extent to which invoices align with the agreed-upon terms and accurately reflect the goods or services provided.
Formula for Calculating Calculating Invoice Accuracy
The Invoice Accuracy Rate is calculated as the number of accurate invoices divided by the total number of invoices, multiplied by 100.
Invoice Accuracy Rate = (Number of Accurate Invoices / Total Number of Invoices) x 100
Importance of Invoice Accuracy KPI
High invoice accuracy reduces administrative time spent on resolving invoice discrepancies and improves the overall efficiency of the procurement process.
Low Invoice Accuracy and Its Implications
Low invoice accuracy could lead to discrepancies, disputes, and delays in payments, which could impact supplier relationships and overall operational efficiency.
Utilizing Invoice Accuracy for Procurement Strategy
Monitoring this KPI helps businesses identify potential issues in the invoicing process, take corrective action, and streamline their procurement operations.
10. Spend Visibility KPI
Spend visibility refers to the ability of an organization to clearly see and understand its spending patterns, distribution, and trends across various categories and suppliers. It encompasses the visibility of spend data, including detailed information on purchases, categories, suppliers, and associated costs..
Formula for Calculating Spend Visibility
Spend visibility is calculated as the tracked spend divided by the total spend, multiplied by 100.
Spend Visibility = (Tracked Spend / Total Spend) x 100
Importance of Spend Visibility KPI
A high spend visibility allows businesses to analyze their expenditure in detail, identify trends, and make data-driven decisions.
Low Spend Visibility and Its Implications
Low spend visibility could lead to inefficiencies, uncontrolled spend, and missed opportunities for savings.
Utilizing Spend Visibility for Procurement Strategy
By improving spend visibility, businesses can enhance their spend management, identify cost-saving opportunities, and improve procurement efficiency.
11. Procurement Cycle Time KPI
Procurement Cycle Time represents the duration from the moment a need is identified within the organization to the point when the requested goods or services are received. It encompasses various stages, including requisition creation, supplier selection, order placement, and delivery.
Formula for Calculating Procurement Cycle Time
This KPI is calculated as the date goods or services are received subtracted from the date the purchase requisition was created
Procurement Cycle Time = Date Purchase Requisition Created – Date Goods or Services Received
Importance of Procurement Cycle Time KPI
A shorter procurement cycle time signifies an efficient procurement process, which can lead to quicker deliveries, lower inventory costs, and improved customer satisfaction.
Longer Procurement Cycle Time and Its Implications
A longer procurement cycle time, however, could lead to delays, higher costs, and potential disruptions in operations.
Utilizing Procurement Cycle Time for Procurement Strategy
Monitoring this KPI enables businesses to identify bottlenecks in their procurement process, streamline their operations, and improve efficiency.
12. Maverick Spending KPI
The Maverick Spending KPI is a crucial Key Performance Indicator (KPI) for companies aiming to control expenditure that falls outside the standard procurement processes or guidelines. Maverick Spend refers to the unauthorized or uncontrolled spending that occurs when employees bypass established procurement procedures.
Formula for Calculating Maverick Spend Rate
Maverick Spend Rate is calculated by dividing the maverick spend by the total company spend and then multiplying by 100.
Maverick Spend Rate = (Maverick Spend / Total Spend) x 100
Significance of Maverick Spend KPI
Monitoring Maverick Spend is essential because high rates can indicate a lack of adherence to procurement policies. This could lead to higher costs, inefficiencies, and potential loss of strategic control.
Implications of High Maverick Spend
A high Maverick Spend rate could point towards weak enforcement of procurement procedures, which might lead to unauthorized purchases, non-compliant supplier selection, and missed opportunities for consolidated purchasing and volume discounts.
Utilizing Maverick Spend for Procurement Strategy
By keeping track of Maverick Spend, companies can pinpoint where their procurement policies are not being followed and take corrective action. Strategies can include internal training, process simplification, or the introduction of an e-procurement system or spend management software to make adherence easier.
13. Contract Utilization KPI
The Contract Utilization KPI measures the extent to which a company’s procurement contracts are being leveraged and utilized effectively. It provides insights into how well the organization is utilizing the contracts it has established with suppliers. This metric helps organizations determine if the negotiated terms and conditions, pricing, and supplier relationships are being fully leveraged to drive cost savings, improve efficiencies, and manage supplier relationships.
Formula for Calculating Contract Utilization Rate
The Contract Utilization Rate is computed by dividing the amount spent under contract by the total contract value and then multiplying by 100.
Contract Utilization Rate = (Amount spent under contract / Total contract value) x 100
Importance of Contract Utilization KPI
A high Contract Utilization rate indicates that the company is maximizing the value of its contracts, achieving economies of scale, and managing spend efficiently.
Low Contract Utilization and Its Implications
On the other hand, a low Contract Utilization rate might suggest underutilization of contracts, potential inefficiencies, and missed savings opportunities. It could also indicate non-compliance with contract terms, leading to increased maverick spend and contractual disputes.
Using Contract Utilization in Procurement Strategy
Monitoring Contract Utilization helps companies identify opportunities to consolidate spend under existing contracts and negotiate better terms with suppliers. This KPI can also support supplier performance management by revealing suppliers that consistently deliver value and those that do not.
14. Payment Terms KPI
The Payment Terms KPI reflects the time period that a company has to pay its suppliers after receiving goods or services. Payment Terms refer to the agreed-upon conditions between a company and its suppliers regarding the payment timeline for goods or services received. This should be clearly visible in most procurement reports. These terms specify the number of days or a specific date by which payment should be made.
Calculating Average Payment Terms
The Average Payment Term in days is determined by dividing the sum of payment terms by the total number of contracts.
Average Payment Term = Sum of Payment Terms in Days by Contract / Total Number of Contracts
The Role of Payment Terms KPI
This KPI is significant as it can help companies manage their cash flow more effectively by indicating the time they have to settle supplier payments. It also provides insights into supplier relationships, as shorter payment terms might signal strong supplier bargaining power or low buyer creditworthiness.
Longer Payment Terms and Their Implications
Longer payment terms could potentially strain supplier relationships and affect the company’s reputation. In contrast, shorter payment terms could put pressure on a company’s liquidity.
Payment Terms KPI in Procurement Strategy
By tracking Payment Terms, companies can negotiate more favorable terms with their suppliers, optimize their working capital, and potentially improve supplier relationships.
15. Spend Per Employee KPI
The Spend Per Employee KPI offers valuable insights into the company’s spending patterns and resource allocation. It helps organizations understand the efficiency of their procurement processes, identify potential areas for cost optimization, and evaluate the impact of expenditures on overall operational performance.
Formula for Calculating Spend Per Employee
This KPI is calculated by dividing the total company spend by the total number of employees.
Spend per Employee = Total Spend / Total Number of Employees
Significance of Spend Per Employee KPI
A lower Spend Per Employee ratio could suggest efficient cost management and resource allocation. It provides a snapshot of how well a company leverages its human resources in relation to its overall expenditure.
High Spend Per Employee and Its Implications
Conversely, a higher Spend Per Employee ratio may indicate inefficiencies, suggesting a need for better resource management or cost control.
Utilizing Spend Per Employee for Procurement Strategy
By tracking Spend Per Employee, businesses can identify potential areas of cost reduction or efficiency gains. It can also help in strategic decision-making about resource allocation, workforce planning, and procurement process optimization.
16. Procurement ROI KPI
The Procurement ROI KPI plays a crucial role in assessing the value and impact of the procurement function within an organization. It provides insights into the financial benefits generated through cost savings, supplier management, and process optimization. It also quantifies the return on the investment made in procurement activities and strategies.
Formula for Calculating Procurement ROI
This KPI is calculated as the difference between cost savings and procurement costs divided by procurement costs.
Procurement ROI = (Cost Savings – Procurement Costs) / Procurement Costs
Importance of Procurement ROI KPI
A higher Procurement ROI indicates a more effective procurement function, demonstrating that the department is adding value to the company by reducing costs.
Lower Procurement ROI and Its Implications
However, a lower Procurement ROI could suggest that procurement operations are costing more than they are saving, implying a need for strategic reassessment.
Procurement ROI in Procurement Strategy
By monitoring Procurement ROI, companies can evaluate the efficiency of their procurement activities, identify areas for improvement, and devise strategies to enhance cost savings and value creation.
17. Supplier Diversity KPI
Supplier Diversity refers to the intentional effort made by a company to engage and work with suppliers that represent a broad range of backgrounds, including minority-owned, women-owned, veteran-owned, and other underrepresented groups. It aims to create opportunities, drive economic growth, and foster a diverse business ecosystem.
Calculating Supplier Diversity
The Supplier Diversity ratio is calculated by dividing the number of suppliers identified as “diverse” by the total number of suppliers.
Supplier Diversity Ratio = Suppliers Identified as “Diverse” / Total Suppliers
Role of Supplier Diversity KPI
A high Supplier Diversity ratio suggests a commitment to inclusivity and social responsibility. It can also provide access to a broader range of ideas, products, and services, fostering innovation and competitive advantage.
Lower Supplier Diversity and Its Implications
A low Supplier Diversity ratio may imply a narrow supplier base, potentially limiting access to innovative solutions and reflecting poorly on a company’s corporate social responsibility profile.
Supplier Diversity in Procurement Strategy
Tracking Supplier Diversity can assist companies in diversifying their supplier base, thereby promoting inclusivity and sustainability, and possibly gaining a competitive edge in the marketplace.
18. Supplier Risk KPI
The Supplier Risk Key Performance Indicator (KPI) is a crucial metric that assesses the potential risk associated with a supplier that may cause disruption or harm to a company’s operations or reputation. It enables organizations to proactively manage and mitigate risks associated with their supplier relationships. By monitoring and evaluating supplier risks, organizations can identify vulnerabilities and take proactive measures to mitigate potential disruptions or reputational damage.
Formula for Calculating Supplier Risk
Supplier Risk is calculated by summing the product of the weight of a risk category and a supplier’s score in that category.
Supplier Risk KPI = Sum Weight of Risk Category x Supplier’s Score in that Category
Significance of Supplier Risk KPI
A higher Supplier Risk score may indicate a higher potential for disruption, making it a critical factor for organizations to consider when selecting and managing suppliers, as this can impact the overall cost of procurement across the entire business.
Low Supplier Risk and Its Implications
Conversely, a lower Supplier Risk score suggests a more reliable and stable supplier, leading to smoother operations and less potential for unforeseen disruptions.
Utilizing Supplier Risk for Procurement Strategy
By monitoring the Supplier Risk KPI, companies can make informed decisions about which suppliers to work with and manage potential supply risk proactively, contributing to a more robust supply chain.
19. Sustainability KPI
The Sustainability Key Performance Indicator (KPI) is a metric that evaluates the degree to which a company’s procurement processes and practices promote environmental sustainability. It assesses the company’s commitment to minimizing its ecological footprint and adopting sustainable practices throughout its supply chain.
Formula for Calculating Sustainability
Sustainability is calculated by summing the product of the weight of a sustainability indicator and the score for that indicator.
Sustainability KPI = Sum (Weight of Sustainability Indicator x Score for that Indicator)
Importance of Sustainability KPI
A higher Sustainability score reflects a company’s commitment to sustainable and responsible procurement practices, which can enhance its corporate image and contribute to its overall sustainability goals.
Lower Sustainability and Its Implications
On the other hand, a lower Sustainability score might suggest a need for improvement in the company’s procurement processes to better align with environmental sustainability practices.
Using Sustainability in Procurement Strategy
Tracking the Sustainability KPI can help companies identify areas for improvement in their procurement processes, align their practices with sustainability goals, and demonstrate their commitment to responsible business practices.
20. Contract Value KPI
Contract Value refers to the monetary worth of a contract established between a company and its supplier. It encompasses the financial obligations, commitments, and terms outlined in the contract, such as the unit price, actual quantity required, and any additional costs specified. The Contract Value KPI plays a crucial role in understanding the financial impact and scale of supplier contracts within the company’s procurement activities. It enables organizations to assess the magnitude of their contractual relationships and evaluate the potential benefits, risks, and implications associated with these agreements.
Formula for Calculating Contract Value
Contract value is calculated by multiplying the unit price by the quantity and then adding any additional costs associated with the contract.
Contract Value = (Unit Price x Quantity) + Contract Additional Costs
Role of Contract Value KPI
Understanding the contract value is crucial for managing procurement budgets, assessing supplier relationships, and evaluating the cost-effectiveness of a contract.
High and Low Contract Value and Its Implications
A high Contract Value may suggest a significant relationship with a supplier, whereas a lower value contract might be a target for further negotiation or supplier diversification.
Contract Value in Procurement Strategy
Keeping track of Contract Value can provide businesses with actionable insights into their spending patterns, assisting in budgeting, supplier management, and strategic procurement decision-making.
How Spend Management KPIs Help Procurement Teams to Understand the Macro Impacts of Daily Decision Making
The modern procurement function is not just about buying goods and services. It’s a strategic arm of an organization, directly influencing financial health, operational efficiency, and overall business success. A key enabler in this strategic role is the understanding and use of Spend Management Key Performance Indicators (KPIs). These procurement KPIs help procurement leaders comprehend the larger implications of their daily decisions.
Decoding Spend Management KPIs
Spend Management KPIs like the examples above, are quantitative measures that a procurement organization can use to evaluate and improve their strategies, processes, and activities. These metrics cover a broad range of areas, including cost savings, spend visibility, supplier performance, and risk management, among others.
For instance, the Spend Under Management (SUM) KPI indicates the percentage of an organization’s spend that is managed by the procurement team. It sheds light on the extent of control the procurement function has over spending at the organizational level.
The Macro Impacts of Daily Decision Making
Every decision that a procurement professional makes impacts various spend management KPIs. For instance, negotiating better contract terms with suppliers affects the Cost Savings KPI, while selecting suppliers based on factors other than actual price influences the Supplier Diversity KPI. Depending on the organization’s goals, monitoring and adjusting strategies based on the trends shown in these procurement KPIs will go a long way towards helping the business achieve its goals and targets.
Every purchasing decision has broader implications for the organization. Enhanced cost savings contribute to the organization’s bottom line, while improved supplier diversity can foster innovation, enhance brand reputation, and ensure supply chain resilience.
As another example, the Maverick Spend KPI, which measures spending outside of approved procurement processes, can alert organizations to potential risks and inefficiencies of different departments or specific team members.
Leveraging KPIs for Strategic Decision Making
Procurement teams can leverage these procurement KPIs to make informed, strategic decisions that align with the organization’s larger goals. By tracking the Procurement Return on Investment (ROI) KPI, for example, teams can assess the financial efficiency of their procurement activities and identify areas for improvement.
Similarly, by monitoring the Sustainability KPI, organizations can evaluate the environmental impact of their procurement practices. This can guide them in incorporating sustainable practices into their procurement strategy, which can enhance their corporate social responsibility standing and create long-term value.
Interested Working with Zanovoy? Arrange an Obligation Free Spend Management Audit?
In a fast-paced and increasingly complex business environment, regular spend management audits are more important than ever. They can shed light on the effectiveness of your procurement strategies, uncover potential risks, and identify opportunities for improvement. We encourage all organizations to incorporate regular spend management audits into their processes, focusing on Spend Management KPIs as key assessment metrics. Use these KPIs as your roadmap to understand the implications of procurement decisions, adapt your strategy, and drive sustainable growth. Remember, the key to efficient spend management lies in informed decision-making, proactive strategy adjustments, and consistent performance tracking. Take the first step today and schedule a comprehensive spend management audit for your organization.