Tracking procurement performance is essential for driving efficiency, reducing costs, and maximizing value. Key Performance Indicators (KPIs) provide a structured approach to measuring success, but selecting the right ones requires alignment with business objectives and procurement strategy. This article outlines how to define the best-fit KPIs for your organization and highlights the most critical procurement metrics.
To establish meaningful KPIs, organizations should factor in several different perspectives that serve their long-term success plan. Consider the following approach when selecting KPIs to specifically cater to the needs of your organization:
To effectively measure procurement success, organizations should track KPIs that provide insight into cost management, process efficiency, supplier performance, and compliance. Below are essential KPIs, including their significance to long-term business strategy, our recommended measurement methods, and best-in-class benchmarks to strive for.
What is it? Evaluates procurement’s financial impact by tracking reductions in costs through negotiations, competitive bidding, and process improvements.
How to Measure: Compare baseline costs to actual procurement expenditures over a given period.
Best-in-Class: Achieving cost savings of 6-12% of total procurement spend annually.
Recommendations: Prioritize strategic sourcing, leverage volume discounts, and implement category management for sustained savings.
What is it? Measures procurement’s ability to prevent unnecessary costs, such as price increases, supplier penalties, or emergency purchases.
How to Measure: Track price increases prevented, early payment discounts secured, and risk mitigation efforts.
Best-in-Class: Achieving cost avoidance equal to or greater than their cost savings.
Recommendations: Focus on long-term supplier agreements, risk management strategies, and proactive contract renegotiation.
What is it? Reflects the efficiency of the procurement process by measuring the time taken from requisition approval to Purchase Order (PO) issuance.
How to Measure: Track the average number of days between requisition submission and purchase order generation.
Best-in-Class: POs processed within 5-8 days (manual or inefficient processes can take 15+ days).
Recommendations: Automate procurement workflows, standardize approval processes, and minimize manual interventions.
Significance: Ensures suppliers are meeting agreed-upon delivery schedules, reducing disruptions and operational delays.
How to Measure: Track the percentage of deliveries received on or before the agreed-upon date.
Best-in-Class: On-time delivery rate of 95% or higher.
Recommendations: Strengthen supplier relationships, implement vendor scorecards, and establish penalties for late deliveries.
What is it? Measures the quality of goods and services received, ensuring suppliers meet performance and compliance standards.
How to Measure: Track the percentage of defective items received relative to total orders.
Best-in-Class: Maintaining defect rates below 1.5% for direct materials.
Recommendations: Conduct regular supplier audits, enforce quality standards, and provide feedback loops for continuous improvement.
What is it? Ensures that procurement spend aligns with negotiated agreements, maximizing cost savings and minimizing unmanaged spend.
How to Measure: Track the percentage of total spend conducted under pre-negotiated contracts.
Best-in-Class: Maintaining contract compliance rates above 85-90%.
Recommendations: Improve contract visibility, enforce procurement policies, and conduct regular compliance audits.
What is it? Measures the percentage of spend occurring outside of approved procurement channels, leading to cost inefficiencies and compliance risks.
How to Measure: Compare off-contract spend to total procurement spend.
Best-in-Class: Keeping maverick spend below 5% of total spend.
Recommendations: Increase user training, enforce procurement policies, and implement guided buying solutions.
What is it? Evaluates procurement’s overall financial contribution by measuring cost savings and value generation relative to procurement costs.
How to Measure: Compare total cost savings to procurement department operational costs.
Best-in-Class: Achieving an ROI of 5-to-1 or higher.
Recommendations: Invest in analytics, optimize procurement processes, and leverage technology to maximize efficiency.
What is it? Tracks procurement’s contribution to sustainability goals by measuring spend with suppliers who meet environmental, social, and governance (ESG) criteria.
How to Measure: Assess procurement spend directed toward suppliers with ESG certifications or compliance with sustainability standards.
Best-in-Class: Targeting 50% or more of spend with sustainable suppliers.
Recommendations: Embed ESG criteria into sourcing decisions, conduct supplier sustainability assessments, and prioritize responsible sourcing initiatives.
What is it? Assesses supplier stability by measuring financial health, compliance risks, and geopolitical factors that could impact operations.
How to Measure: Use a risk scoring model based on financial viability, regulatory compliance, performance history, and location-based risks.
Best-in-Class: Mitigate disruptions and achieve supplier risk scores in the low-risk range.
Recommendations: Implement supplier risk assessment tools, diversify supply sources, and establish contingency plans.
Well-defined KPIs provide clear insights into procurement performance and help organizations drive continuous improvement. By selecting metrics that align with strategic priorities and adapting them over time, businesses can enhance procurement effectiveness, reduce costs, and strengthen supplier relationships.
For organizations looking to refine their procurement KPI framework, Optis provides expert guidance to ensure alignment with industry best practices and business objectives. Contact us today.
