Written by Marijn Overvest | Reviewed by Sjoerd Goedhart
Fact Checked by Ruud Emonds | Our editorial policy
Procurement Metrics — The 6 Essential Factors to Consider in Every Deal
Table of contents
Key takeaways
- Procurement metrics aid in helping procurement professionals comprehend the extent of their negotiations.
- The 6 procurement metrics are price, volume, supply, contract period, payment terms, and specifications.
- These procurement indicators are linked providing the best solutions for the best values in each transaction.
Wondering what to include or exclude in your upcoming deal? What are your key procurement metrics?
There are six very important variables that any procurement manager should definitely include in every deal. Knowing what these variables are, will help you to capture all the issues that are likely to affect the total value of your upcoming negotiation.
Once you define them, you can use them to broaden the scope of your negotiation and to consider the consequences of performance around these variables.
Remember: Always link the variables to each other to get the most out of your deal! Learn all about the most important procurement metrics.
But before you proceed to read the whole article, I have created a free-to-download editable procurement benchmarking template. It’s a PowerPoint file you can use to analyze the effectiveness of the different processes in your procurement. I even created a video where I’ll explain how you can use this template.
1. Price
How much will be paid?
As a procurement manager, you can build agreements that include different pricing structures. These can be linked to the following variables:
- The purpose for which the product or service will be used for
- Geography
- Relationship loyalty
Remember: The variables should always also be linked to the other five primary variables. If you do not do this, the negotiation will most likely end up in a positional bargaining game. To avoid this, make sure you link the price to the following variables.
2. Volume
How many, how much, or what type?
Most procurement managers will know: There is a direct relationship between price and volume. How higher the volume, the lower the price. The economies of scale usually provide for this. A skilled procurement manager will ask for a published discount tariff for every piece the volume goes up.
Another negotiation variable to link to volume is the volume threshold, where you get a discount and/or bonus on the total purchasing value when you reach a certain volume. These agreements can be called retrospective bonuses, purchase volume rebates, and growth bonuses. Make sure you include them in every deal!
3. Supply
When, where, lead time
This refers to where, by when, and how the product or services are to be delivered or completed. In the example of delivery planned every first of the month, further variables can be introduced in the negotiation to make sure the consequences are clear when delivery commitments are not respected by the supplier.
Think before closing your deal: What are the factors that can possibly influence my delivery? How to mitigate all risks?
For example, when you’re a procurement manager working in construction; choose to negotiate that accommodated shared risks, recognizing circumstances beyond your control like weather. If it snows 60 days during the winter instead of the common 10 days and delay will be inevitable, make sure that is included in the contract. What are the implications and who’s gonna pay for it?
4. Contract period
When will the contract start, how long will it be active, when will it be reviewed, and: under which terms can the contract be terminated?
Before closing any deal, think of the contract duration. The start, stop, pause, and cancel terms are important to include in every contract. Even if you have an ongoing rolling-contract, there will still be circumstances upon which an opt-out clause can be contractually exercised.
Another variable designed to protect contract period commitments is termination, where you stipulate where one party can terminate the contract with or without reason or consequence as well as defining when the option to renew becomes available.
5. Payment terms
When, how, currency
There are many ways of constructing payment terms to reflect the risk to those involved, the commitment to see the work through, or simply to increase the value of the deal. The team of Procurement Tactics breaks them down into 4 simple variables that every professional negotiator can include in the process of dealmaking.
- When and how payment will be made
- Advanced deposits
- Delayed payment
- Late payment penalties
Proposals that include payment terms can be triggered based on the performance of your supplier, can be held on account, paid retrospectively, be refundable, or with a defined number of days credit.
Sometimes payment terms are a reflection of cash flow requirements, the risk associated with the creditworthiness or history of the other party, or simply a reflection of the standard terms of the most dominant party in the negotiation. Whichever one of these features, payment terms have a financial implication for both parties and will feature as a primary variable.
6. Specifications
What the product, service, or agreement will include and/or how it will be supported by the supplier.
Specifications relate to almost anything that impacts the quality of the product or service that is being offered. A product in a supermarket in addition to raw materials can relate to size, design of the packaging, carton box, type of packaging, traceability, color, opening: and each of these will have a multitude of options each impacting on the cost or value of the finished product.
For example, imagine the number of variables involved for a procurement manager sourcing components for a spaceship from one of the main manufacturers with literally thousands of specifications, which all affect the total outcome of the agreement. The complexity of the product or service, where it’s being sourced from, the financing arrangements, and the relationship between people and companies will all have some impact on the level of detail and the number of variables that will relate to specification.
Tip: When starting the negotiation, try to find out as soon as possible which is the most important variable for the party negotiating with. When they tend to focus on price, try to negotiate harder on other variables as compensation for or adjusting the price point. Again, make everything conditional. This will ensure you get the most of your total deal.
Want to know more about closing the perfect deal? Check out our Negotiation Course For Procurement Professionals.
Conclusion
There are 6 very important variables or metrics that any procurement manager should include in every deal. The 6 procurement metrics are price, volume, supply, contract period, payment terms, and specifications.
These are important to consider because these measure or quantify the most important factors in every negotiation or deal. In order to save costs, acquire the best quality of goods and services, make the best and hassle-free delivery.
With that, procurement managers get the best values at the right price without having to compromise any of the other variables and metrics.
Frequentlyasked questions
Why is it important to consider the procurement metrics in every deal?
Including these metrics can help a procurement professional capture all the issues that are likely to affect the total value of an upcoming negotiation.
What are the 6 procurement metrics to include in every deal?
Price, volume, supply, contract period, payment terms, and specifications.
How can procurement metrics help procurement managers get the best value in every deal?
Defining the procurement metrics lets procurement managers broaden the scope of their negotiation and consider the consequences of performance around these metrics.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
