Written by Marijn Overvest | Reviewed by Sjoerd Goedhart
Fact Checked by Ruud Emonds | Our editorial policy
Procurement Performance — Everything You Need to Know
Key takeaways
- Procurement performance is the process of ensuring that the products or services obtained fulfill the requirements and expectations of the company.
- Procurement performance enhances organizational effectiveness through collaboration, ensuring superior goods and services for customers.
- Procurement performance proactively reduces risks of supply chain disruptions or product quality issues.
Procurement performance, perhaps, is the most crucial factor in all of your procurement processes. It is the culmination of all the processes done throughout your organization’s procurement and reflects just how successfully the procurement processes were executed.
For this article, we will take a deeper look at what procurement performance is. Additionally, we will explore its importance, key steps, and the KPIs to measure it.
After reading this article, you should have a better understanding of procurement performance and its relevance in the overall procurement of your organization.
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.
What is Procurement Performance?
Procurement performance is the process of ensuring that the products or services obtained fulfill the requirements and expectations of the company. It is a crucial component of any organization’s operations since it may guarantee that resources be used wisely and that essential things are quickly acquired.
Basically, procurement performance refers to the evaluation and measurement of the effectiveness, efficiency, and overall success of a procurement function within an organization.
The three main components of procurement performance are procurement planning, procurement execution, and post-procurement management which we will be explaining in detail.
1. Procurement Planning
Planning involves gaining a deep understanding of the organization’s needs and wants as well as identifying suitable supply sources.
2. Procurement Execution
This stage involves entering into contracts with suppliers to obtain the needed items or services, keeping track of and managing supplier performance, and guaranteeing that products satisfy organizational standards.
3. Post-Procurement Management
This stage includes addressing and resolving any problems that might have come up during the procurement process, keeping track of the finances to make sure that it was spent properly, and making any necessary changes to policies or procedures.
Why is ProcurementPerformance Important?
Procurement Performance is a crucial indicator of achievement in any organization. Output and outcome are the two divisions that can be made. The procurement department’s output, such as contracts or bills, is measured. Whether the given goods or services match the objectives or standards of the firm is measured by the outcome.
Output is important because it demonstrates if the procurement department is accomplishing its objectives. If output is low, it’s possible that the purchasing division isn’t providing customers with high-quality goods or services.
Results are significant because they demonstrate if the goods and services provided by the procurement division satisfy customers’ expectations and adhere to timelines. If the result is poor, the procurement department may not be approving contracts or invoices quickly enough, which could result in the loss of clients and decreased profitability for the organization.
Additionally, procurement performance can be impacted by a wide range of variables, including organizational structure, rules, processes, and culture. All departments within a company can adhere to standardized processes and practices when making purchases by properly establishing and enforcing policies and procedures. Project completion speed can be greatly improved by having a culture that encourages efficient procurement.
Overall, efficient procurement performance promotes organizational effectiveness by ensuring that all divisions collaborate to achieve shared objectives. In the end, this results in customers receiving superior goods and services.
Procurement Performance:Key Steps
Procurement performance refers to a company’s capacity to make wise purchases of products and services. The effectiveness of the procurement process can be evaluated in terms of timeliness, price accuracy, and supplier reliability There are five key steps in Procurement Performance:1. Planning
Planning is essential when ensuring Procurement is efficient. Additionally, alternatives and contingency plans should be included should a discrepancy occur.
2. Setting objectives
Setting objectives helps in ensuring that the procurement’s goals are realized. The objectives should be attainable, yet demanding enough to encourage creativity without being unachievable.
Additionally, goals may be determined by business priorities or client requirements. The goal should be specific and measurable, attainable, realistic, and time-bound.
3. Acquiring goods and services
The most time-consuming step is getting products or services, hence it’s critical to reduce this time by employing efficient sourcing techniques. Price, quality, delivery time, and other considerations should all be taken into account while evaluating supply sources.
4. Monitoring and controlling
Evaluate whether the procurement’s goals have been met. This involves verifying the accuracy of purchase order database entries, checking supplier performance information for compliance with contract terms and conditions, carrying out post-buy auditing operations to make sure that products satisfy specifications, and, if necessary, sending termination warnings.
5. Closing the purchasing process
Confirms that each party has complied with their contractual responsibilities in the procurement. This also involves finalizing every other matter.
Procurement Process KPIs
Here are a few KPIs to assess the overall Procurement Performance of your organization.
1. Cost reductions
Many companies are looking for ways to minimize their cost by negotiating better prices on products and materials that they need. However, others do not recognize that they need to assess efficiency improvements to reduce the cost of labor.
Streamlining and automating your procurement processes can reduce your labor costs. Through automation, you can lessen the need for you to hire additional staff when your demand rises.
2. Savings
Cost savings make the top management happy with your procurement strategy and this can happen by using KPI to put hard evidence of the cost savings that you are generating in front of the top management.
You can do this by keeping track of whether you will be able to get better prices when you switch to other suppliers. Additionally, to know your true savings figure, you should remember to assess and calculate unavoidable costs through KPIs.
3. Cost avoidance
Cost avoidance avoids potential extra costs that the company may incur in the future. This can be done by replacing the defective parts before it fails and damages the other parts. This is sometimes called soft savings.
Through KPIs, you can develop a strategy to map your cost avoidance and combine it with the cost reduction for you to avoid future extra costs.
4. Total spending by suppliers
By using KPIs in this process, the company can find out how many suppliers it has. Thus, knowing if you are getting the best deal out of all your suppliers.
By consolidating the numbers of your suppliers, you can lower the costs by acquiring materials or services more affordably.
5. Procurement ROI
For many procurement professionals, procurement ROI is the most important KPI. However, it should be analyzed with the other metrics to see the bigger picture.
In calculating the procurement ROI, you will need to divide the annual cost savings by the annual internal cost and express it as a ratio. If the procurement investments are low, it is more applicable to measure hard cost savings mainly without the avoidance and other value chain improvements.
Additionally, setting it higher than the internal investment for the procurement department is a good target for your company.
6. Purchase order cycle times
You may ask yourself, how quickly does your company place a purchase order? The purchase order cycle times are a crucial procurement KPI. It demonstrates the efficiency of the operation and procurement efforts of the company against other companies.
By having a purchase order cycle times KPI, you can reduce the overall cost and productivity of the procurement functions. Additionally, the productivity of your staff can be further enhanced by reducing the cycle time of your purchase orders.
7. Contract compliance
To know if you are getting the best deal from the contract you have signed with your supplier, you must check if they are following all the terms of the contract.
You must create a contract compliance KPI in ensuring that you can make your suppliers accountable for what they have promised in the contract. If they comply with all the requirements, the company will see more opportunities for collaboration and growth.
Conclusion
The procurement performance process is crucial for two reasons. The first reason is to make sure the business fulfills its contractual responsibilities while also obtaining the greatest deals on the items it requires. This guarantees that the business can continue to function normally and stay afloat even in trying circumstances.
The second reason procurement performance is crucial is that it guarantees that everything will go well after a purchase has been made by ensuring that the required documentation, signatures, and permissions are in place before it is done.
Frequentlyasked questions
What is Procurement Performance?
Procurement Performance is the process of ensuring that the products or services obtained fulfill the requirements and expectations of the company.
Why is it important?
Procurement Performance is a crucial indicator of achievement in any organization. Output and outcome are the two divisions that can be made.
How to evaluate Procurement Performance?
The effectiveness of the procurement process can be evaluated in terms of timeliness, price accuracy, and supplier reliability
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.
