Measuring Effectiveness of Procurement Solutions and Processes
"If you can't measure it, you can't manage it."
- Peter Drucker
It takes lot of time and effort in implementing procurement solutions.But after doing all the hard work, how often we check if we are getting the bang for the buck invested in implementing all this. Often there is lack of clarity on measuring criteria for such solutions. Here is a proposed framework of metrics that can be used to measure effectiveness of procurement solutions.
Broadly speaking there are four categories for e-procurement solutions
1. Analysis and planning
2. Strategic Sourcing and ontracting
3. Requisition to Pay
4. Supplier life cycle management
Analysis and planning - This is where you carry out purchasing volumes and supplier analysis. Savings opportunities can be identified and a Sourcing strategy is created here.
Strategic Sourcing and Contracting - At this stage negotiation process happens based on defined sourcing strategy. Finally a contract is created for the negotiated price and terms.
Requisition to Pay - This is where rubber meets the road and negotiated price and contract terms are put into usage through day to day requisitioning and ordering process.
Supplier Life cycle management - This essentially touches all the above three processes. SLC is now a mature solution area encompassing entire spectrum of supplier lifecycle from on-boarding to phase out. It deals with monitoring various dimensions like performance, risk, sustainability etc. Suppliers are also put through development process in case performance is not as per target level.
In order to devise an approach to measure effectiveness for these different areas, we need to focus on two unique characteristics of these processes - Transaction volume and Strategic team involvement.
For high Strategic team involvement, focus should be on dollar savings, whereas for high transaction volume, focus should be on improving process efficiency.
Based on above approach, following KPI framework can be used to measure the effectiveness of implemented solution.
Analysis and Planning:
Savings opportunity identification - % value of Savings opportunities identified out of total spend
Budgeted vs Actual Spend variance - % difference of budgeted spend and actual spend
Strategic Sourcing and Contracting:
Negotiation Performance - % Price reductions
Contract Performance - % Value from negotiated clauses like Payment terms, price escalation etc.
Requisition to Pay:
Touch less order rate - Percentage of Requisitions/orders created without intervention from purchasers
Contract compliance - Percentage of orders created with contract reference
Cycle time for PO - Average lead time for sending out PO to suppliers
Supplier Lifecycle Management:
Supplier Onboarding cycle time- Average lead time to onboard new supplier
Supplier base efficiency - % of suppliers covering 80% of spend (pareto principle)
Supplier Improvement - % of suppliers above benchmark performance
It might be initially challenging to measure these KPIs, however the vital part is getting started. Once started, these can be further refined to reflect the actual effectiveness of processes and solutions.