Procurement processes often need more timely deliveries, unexpected costs, and efficient supplier management. Without clear metrics, data gets lost, budgets spiral, and opportunities for savings slip through the cracks. These challenges lead to wasted resources, missed targets, and strained supplier relationships.

However, tracking the right KPIs in procurement with advanced analytics can reverse this, giving you the insights needed to make smarter, faster, and more cost-effective decisions. In 2023, the global procurement analytics market was estimated at USD 4.13 billion and is anticipated to grow to USD 5.18 billion by 2024. Forecasts indicate that, with a remarkable CAGR of 24% between 2024 and 2034, the market will exceed USD 44.53 billion by 2034. The stats show how important these metrics are to modern businesses.

This guide will walk you through the essential procurement KPIs every business should measure and track.

How the Procurement Process Works?

The procurement process is a sequence of processes businesses follow to source and buy products or services. These steps differ across industries. For some, it's a straightforward purchasing activity; for others, it includes multiple steps leading to the final purchase.

The structure of the procurement process depends on factors like:

• The business operating model
• Company size
• Business Location
• Financial budget
• Compliance requirements
• Organizational structure

An efficient procurement process directly influences a company's profit margins and the quality of its goods and services. Here’s how it goes:

• Need Identification: The process starts by identifying the need for goods or services.
• Vendor Selection: A suitable vendor is found based on requirements, quality, and cost-effectiveness.
• Purchase Order Creation: Once the vendor is chosen, a purchase order detailing all specifications, terms, and conditions is prepared.
• Order Processing: The vendor processes the order after receiving the purchase order document.
• Goods Inspection: Upon receiving the goods or services, the procurement team inspects them to ensure they meet quality standards.‍
• Acceptance or Rejection: The team accepts or rejects the order based on the inspection.‍
• Invoice Settlement: If accepted, the next step is promptly settling the invoice. To optimize this process, businesses must track procurement key performance indicators and.‍
• Accurate Documentation: Throughout the process, maintaining accurate documentation is crucial for compliance and auditing.‍
• Key Documents: Essential documents include the purchase requisition, purchase order, and vendor invoice.

To truly optimize this process, businesses must track procurement key performance indicators and procurement metrics. These metrics provide valuable insights into efficiency, cost savings, and vendor performance, ensuring the procurement process aligns with the company's goals.

Importance of Procurement KPIs for Business

Key performance indicators (KPIs) are crucial for measuring specific performance areas. They help project teams track and communicate progress clearly and objectively. In procurement, KPIs are more detailed, offering particular goals that can be monitored daily or monthly. Let's take a thorough outlook on why they matter to your business:

• Monitoring performance: KPIs allow businesses to track and evaluate the performance of their procurement function. Metrics like cost savings, supplier performance, and cycle times provide insights into overall efficiency.
• Goal alignment: KPIs help align procurement activities with broader organizational goals. Businesses can make informed decisions to achieve their objectives by tracking specific metrics.
• Making decisions: KPIs provide data-driven insights that reveal areas for improvement, optimization opportunities, and potential risks within the procurement process.
• Managing suppliers: KPIs enable businesses to evaluate and manage supplier relationships effectively. This includes assessing quality, delivery times, compliance, and the overall value provided.
• Continuous improvement: KPIs help identify trends, patterns, and areas for enhancement within procurement processes, fostering a culture of ongoing improvement and optimization.
• Benchmarking: KPIs allow companies to compare their performance to industry norms, identifying opportunities for improvement and streamlining their workflow.‍
• Mitigating risks: KPIs help reduce risks linked to procurement activities, ensure efficient operations, and align with overall goals and objectives.

Annual Procurement: Strategic Foundation for Measuring Procurement Success

Annual procurement cost is the total expenses associated with an organization's purchasing and procurement activities over a fiscal year, excluding the actual cost of materials or services. This crucial metric focuses on the operational costs of the procurement function itself, providing valuable insights into the efficiency of procurement processes.

Understanding annual procurement cost is essential when discussing procurement KPIs because it:

1. Isolates procurement department efficiency from material costs
2. Helps identify opportunities for process improvement
3. Enables benchmarking against industry standards
4. Supports decision-making on resource allocation within the procurement function

By tracking annual procurement costs alongside other KPIs, organizations can:

• Assess the return on investment of their procurement activities
• Justify investments in procurement technology or training
• Demonstrate the value added by the procurement team to the overall business

It's crucial to remember that while reducing annual procurement costs is often a goal, it should be balanced against maintaining quality and effectiveness in procurement operations. When used in conjunction with other KPIs, this metric provides a comprehensive view of procurement performance and helps drive strategic improvements in the purchasing function.

What Are the Most Important KPIs For Business?

As procurement evolves, teams now focus on end-to-end tracking to manage costs, sourcing, quality, and delivery. While each business tracks unique metrics, many procurement teams share common goals. To support your objectives, we've listed 14 essential procurement KPIs.

1. Number of Suppliers

A business’s procurement team may work with single or multiple suppliers for specific items. Using multiple suppliers reduces dependence and minimizes disruption risks. This procurement KPI tracks the total number of engaged suppliers. While multiple vendors diversify sourcing, too many can limit bulk discounts. Suppliers are classified into contracted (with agreements) and unlisted (without contracts).

To calculate the Number of Suppliers KPI, consider the formula:

• Number of Suppliers = Total Contracted Suppliers + Total Unlisted Suppliers

Example: If a business has ten contracted suppliers and five unlisted suppliers, the total number of suppliers would be: Number of Suppliers = 10 + 5 = 15 

2. Compliance Rate

The Compliance Rate KPI measures how well suppliers adhere to the terms and agreements established with the company. This includes delivery timelines, discount agreements, response times in case of issues, and payment terms. A drop in compliance can lead to increased indirect procurement costs or maverick spending.

The formula for calculating the Compliance Rate KPI is:

• Compliance Rate (%) = (Number of Compliant Deliveries / Total Deliveries) × 100

Example: If a supplier made 50 deliveries in a month, and 40 of them met the agreed-upon terms, the compliance rate would be: Compliance Rate (%) = (40 / 50) × 100 = 80%

Note: A mid-sized company's compliance rate target of 50% or higher is reasonable. 

Ideally, businesses should set the benchmark for compliance rate at at least 90% or higher. This indicates that most orders are fulfilled according to agreed-upon specifications and timelines, reflecting strong supplier performance and effective procurement processes.

3. Supplier Quality Rating

The Supplier Quality Rating KPI evaluates supplier performance and quality, making it an essential metric for assessing supplier performance management. It helps gauge the reliability and consistency of current suppliers, influencing both present and future relationships. 

To calculate the Supplier Quality Rating, consider the formula:

• Supplier Quality Rating (%) = [(Total Deliveries - Total Defective Deliveries) / Total Deliveries] × 100

Example: If a supplier made 100 deliveries in a quarter, with 90 being defect-free and 10 containing defects, the quality rating would be: Supplier Quality Rating (%) = [(100 - 10) / 100] × 100 = 90%

Note: A rating above 85% is typically considered good, indicating that the supplier consistently meets quality expectations. 

Manufacturing companies may consider setting a Supplier Quality Rating benchmark of 85% or higher, which can enhance component quality and positively influence overall production reliability.

4. Supplier Availability

The Supplier Availability KPI assesses a supplier's responsiveness to urgent requirements, indicating how dependable they are when demand is high. This KPI helps businesses measure suppliers ' reliability by tracking how often they can fulfill orders promptly.

The higher the supplier's availability, the more reliable they are in ensuring a steady flow of goods and services. This metric is crucial for companies that rely on seamless operations across various purchase channels, such as online, mobile, and in-store.

5. Supplier Defect Rate

The Supplier Defect Rate KPI is crucial for evaluating the quality of individual suppliers. This metric allows the purchasing department to assess the final product quality by identifying how many substandard items a supplier delivers. 

The formula for calculating the Supplier Defect Rate is:

• Supplier Defect Rate (%) = (Total Defective Units / Total Units Delivered) × 100

Example: If a supplier delivered 10,000 units and 250 were found to be defective, the defect rate would be:

Supplier Defect Rate (%) = (250 / 10,000) × 100 = 2.5%

Note: Manufacturing sectors may aim for a target defect rate of 1% to 2%, translating to 10,000 to 20,000 defects per million units (PPM).

6. Purchase Order Cycle Time

The Purchase Order (PO) Cycle Time KPI measures the time taken from when a purchase requisition is submitted until the supplier or contractor acknowledges it. This KPI covers most of the procurement process, including PR creation, PR approval, PO creation, PO approval, PO submission, and PO acknowledgment.

The formula for calculating the Purchase Order Cycle Time is:

• Purchase Order Cycle Time = Order Completion Date - Order Request Date

Example: If a purchase requisition was submitted on January 1st, and the purchase order was finalized and sent to the supplier by January 5th, the PO cycle time would be:

Purchase Order Cycle Time = January 5th - January 1st = 4 days

By categorizing suppliers based on their cycle times—short (4 days or less), medium (5 to 8 days), or long (over 8 days)—businesses can identify the most efficient vendors for urgent orders. However, the ideal benchmark is 5 hours.

7. Lead Time

Lead Time measures the total time required to fulfill an order, from initiating a purchase order to delivering and testing the goods or services. This KPI helps businesses gauge efficiency and supplier reliability. Unlike the PO cycle time, lead time covers the entire process, from initiating a purchase order to the final delivery.

The formula for calculating Lead Time is:

• Lead Time = Order Delivery Date - Purchase Order Submission Date

Example: If a Purchase order was  submitted  on February 1st and delivered on February 15th, the lead time would be: Lead Time = February 15th - February 1st = 14 days

Note: Manufacturing companies may target 2 to 3 weeks lead times due to the complexity of sourcing materials and production schedules.

8. Emergency Purchase Ratio

The Emergency Purchase Ratio KPI helps track the frequency of unplanned or urgent purchases within a business. While occasional ad hoc requests are standard, many emergency purchases can indicate inefficiencies in the procurement strategy, such as poor inventory management or inadequate planning. This often overlaps with maverick spending, which refers to purchases made outside approved procurement processes.

Frequent maverick spend can lead to more emergency purchases, as employees may bypass established procurement protocols to address urgent needs. Monitoring this KPI can help identify where such unplanned spending occurs and how it impacts overall procurement efficiency.

The formula for calculating the Emergency Purchase Ratio is:

• Emergency Purchase Ratio (%) = (Number of Emergency Purchases / Total Purchases) × 100

Example: If a business made 200 total purchases in a month, with 20 being emergency purchases, the ratio would be: Emergency Purchase Ratio (%) = (20 / 200) × 100 = 10%

‍Note: Ideally, maintaining an Emergency Purchase Ratio of less than 5% of total purchases is a strong benchmark. This suggests that most procurement activities are well-planned and reduce the need for unplanned purchases. Manufacturing companies may target even lower ratios to ensure stable supply chains.

9. Purchases in Budget and Time

The "Purchases in Budget and Time" KPI monitors how effectively procurement stays within planned budgets and timelines. It helps procurement managers identify any discrepancies in spending or delays in the purchasing process, ensuring that purchases remain efficient and cost-effective.

The formula to calculate this KPI is:

• Purchases in Budget and Time (%) = (Number of Purchases Completed Within Budget and Time / Total Purchases) × 100

Example: If a company completed 150 purchases in a quarter, with 120 of them being within budget and on time, the calculation would be: Purchases in Budget and Time (%) = (120 / 150) × 100 = 80%

Note: Ideally, setting a benchmark for at least 90% of purchases to be completed within the allocated budget is a strong financial management strategy, ensuring effective procurement practices and tighter control over spending.

10. Cost of the Purchase Order

To fully understand the Cost of the Purchase Order, it's essential to break down how the total procurement cost is calculated. One key factor is the time spent converting a purchase requisition (PR) into a purchase order (PO). This time includes activities like reviewing, approving, and processing documentation. To determine the labor portion of the procurement cost, multiply the average time from PR to PO submission by the hourly labor cost of the personnel involved.

This labor cost other administrative expenses, and processing fees contribute to the overall procurement costs. The formula for calculating the Cost of the Purchase Order is:

• Cost of the Purchase Order = Total Procurement Costs / Number of Purchase Orders

Example: If the total procurement costs for a month were $10,000, and 50 purchase orders were processed, the average price per purchase order would be: Cost of the Purchase Order = $10,000 / 50 = $200

11. Procurement Savings 

The Procurement Cost Reduction KPI measures the percentage of cost savings achieved through negotiation and cost management efforts. It reflects the procurement function's efficiency in driving tangible savings.

The formula for calculating Procurement Cost Reduction is:

• Procurement Cost Reduction (%) = [(Old Cost - New Cost) / Old Cost] × 100

Example: If a company previously paid $50,000 for a particular service but negotiated the cost down to $45,000, the saving % would be: Procurement Cost Reduction (%) = [(50,000 - 45,000) / 50,000] × 100 = 10%

Note: Companies may target procurement savings of  5% to 10% of total spend annually. Meeting such a benchmark is achievable for many organizations and reflects a proactive approach to cost management.

12. Procurement Cost Avoidance

Procurement Cost Avoidance is a metric that helps procurement managers identify and implement strategies to avoid potential future costs. Often referred to as a "soft saving" KPI, it differs from "hard savings" metrics like procurement cost reduction, as it focuses on preventing additional expenses rather than reducing existing ones.

The formula for calculating Procurement Cost Avoidance is:

• Procurement Cost Avoidance = (Original Cost - Negotiated Cost) / Original Cost × 100

Example: Suppose a supplier originally quoted $120,000 for a contract, but through negotiation, the procurement manager managed to secure a deal at $100,000. The cost avoidance would be: Procurement Cost Avoidance (%) = (120,000 - 100,000) / 120,000 × 100 = 16.67%

This means the procurement team avoided an additional 16.67% in costs.

Note: Companies might consider setting a benchmark for procurement cost avoidance at 15% of total procurement spend annually. This range suggests a proactive approach to cost management and reflects effective negotiation and strategic sourcing efforts.

13. Spend Under Management

The Spend Under Management KPI is a crucial management metric that helps track and optimize a company's expenses. It encompasses strategically managed spending, including negotiated rates with suppliers and control systems that ensure the use of these agreed-upon prices. 

For example, ABC Manufacturing is a fictional mid-sized manufacturing company that spends $5 million annually on various goods and services, including raw materials, office supplies, maintenance services, and IT support. To improve cost control, the company aims to bring more of this spending under a structured procurement process.

Initially, only $2 million of their spending was managed through formal procurement procedures—meaning the purchases followed approved supplier agreements, went through a competitive bidding process, or were tracked and negotiated by the procurement team. The remaining $3 million involved maverick spending, such as departments making one-off purchases without involving procurement or using non-approved suppliers.

Over the year, ABC Manufacturing’s procurement team worked to negotiate better contracts with vendors, set up a preferred supplier list, and implement an e-procurement system that required all purchases to be routed through the procurement department. As a result, they successfully managed an additional $1.5 million of their spending, increasing their total spend under management to $3.5 million.

Spend Under Management Calculation:

• Total Annual Spend: $5 million
• Spend Under Management: $3.5 million

Spend Under Management (%) = (Spend Under Management / Total Spend) × 100

Spend Under Management (%) = ($3.5 million / $5 million) × 100 = 70%

Note: Setting a benchmark of 70-80% can be an effective strategy, helping companies gain better control over spending, strengthen supplier relationships, and achieve greater cost savings through more efficient purchasing practices.

14. Procurement ROI

The Procurement ROI (Return on Investment) is a key metric that evaluates the profitability and cost-effectiveness of procurement investments. It provides insights into how much value the procurement function generates regarding the costs incurred. 

The formula for calculating Procurement ROI is:

• Procurement ROI = Annual Cost Savings / Annual Procurement Costs

Example: If a company saved $500,000 annually through its procurement activities and the total annual procurement cost was $100,000, the procurement ROI would be: Procurement ROI = 500,000 / 100,000 = 5

This result indicates the company gains $5 in savings for every dollar spent on procurement. 

‍Note: Ideally, setting a procurement ROI target of 10x the internal investment is a robust procurement strategy, ensuring that the function significantly contributes to the organization's profitability.

Exploring the Key Types of Procurement for Business Efficiency

Understanding the different types of procurement is essential for managing business expenses and streamlining operations. Each type uniquely ensures the right goods, services, or materials are sourced efficiently. Let's check them out:

1. Direct Procurement

Direct procurement involves purchasing goods, raw materials, or services from suppliers to produce a company's products or services. Manufacturing companies commonly use this method. Steel, hardware, software, and electrical components are examples of raw materials acquired through direct procurement.

Careful planning is crucial in direct procurement, as careless purchasing can lead to overstocking or shortages. The major purpose is to make a profit and establish strong supplier connections.

2. Indirect Procurement

Indirect procurement refers to buying goods or services needed for day-to-day business operations. These are not directly involved in the production process but are essential for running operations smoothly. Examples include repair services, office supplies, and IT hardware or software. 

KPIs such as cost, inventory, delivery, and quality fall under indirect procurement metrics. Important indirect procurement key performance indicators include spending under management, purchase order cycle, and inventory turnover, which we'll explore further below.

3. Services Procurement

E-procurement software solutions can streamline and simplify this entire process.

Services procurement focuses on outsourcing services like consulting, marketing, and IT support to meet business needs and objectives. The process involves identifying the required services, selecting reliable vendors, and negotiating contracts. Like with goods procurement, e-procurement software solutions can streamline and simplify this entire process, making it easier to manage service and product acquisitions efficiently.

4. Goods Procurement

Goods procurement involves purchasing physical goods required for the business. It can be either direct or indirect, depending on the need. Effective planning and forecasting are vital for successful goods procurement. Items like metals, office equipment, and glass are common examples procured in this category.

Best practices for tracking procurement KPIs

Implementing eProcurement, ERP (Enterprise resource planning), or BPA (Blanket Purchase Agreement) tools marks a significant step toward efficiency. To make the most of these tools, keep these best practices in mind:

1. Set Clear Goals and Objectives

Define specific goals for your procurement strategy, focusing on the KPIs for procurement that align with your business objectives. Identify improvement areas and involve your team to create a detailed action plan that drives success and accountability.

‍Example: Coca-Cola has set clear procurement goals by taking a strategic approach to sourcing, focusing on innovation, sustainability, and cost-efficiency. Their procurement team manages billion-dollar categories like packaging, ingredients, and transportation, ensuring supplier diversity and long-term growth.

2. Analyze  Accurate Procurement Data

Leverage data that directly supports your procurement performance metrics. Ensure this data is accurate, up-to-date, and relevant to avoid costly mistakes. A centralized, real-time data system like an ERP will help you capture key procurement data effectively. On top of it, procurement analytics platforms like INSIA can help you connect different data points and give you a holistic view of your entire procurement process. This will help evaluate KPIs effectively so you can make informed data decisions. 

Example: Walmart achieves supply chain transformation by effectively utilizing accurate procurement data. This approach allows them to focus on demand forecasting, supplier evaluation, and optimizing logistics processes. With centralized, real-time analytics, they track sales, inventory, and supplier performance across their vast store network, enhancing decision-making and boosting operational efficiency.

3. Engage and Educate Your Team

Effective communication is crucial for any new implementation. Involve your procurement team, ensuring they understand the latest workflows and how their roles contribute to the results. Regular training and open dialogue can help them adapt to new systems and processes.

‍Example: Toyota engages and educates its procurement team through the Toyota Production System (TPS), which emphasizes lean procurement and just-in-time practices. They focus on eliminating waste, aligning procurement processes with production needs, and ensuring team members understand the "pull" system, where parts are ordered only as needed to match customer demand.

4. Continuously Improve KPIs in Procurement

KPIs should be regularly reviewed and refined to adapt to changing market conditions. By tracking and analyzing procurement performance metrics, businesses can identify areas for improvement and implement necessary changes, ensuring long-term efficiency and success.

Example: Amazon continuously improves procurement KPIs using real-time data, strategic sourcing, and centralizing procurement processes. They focus on spend analysis, supplier performance tracking, and cost savings​to refine their procurement efficiency.

Conclusion

Creating procurement KPIs isn't always straightforward, but understanding business needs and key performance indicators helps align them with organizational goals. A cloud-based digital procurement solution enables businesses to measure KPIs, gain insights, reduce risks, and boost profitability. With INSIA, organizations benefit from an all-in-one tool that streamlines procurement across the entire procure-to-pay cycle.

Here’s what makes INSIA’s procurement management a standout choice​:

• Holistic View: Provides a comprehensive view of purchasing processes.
• Real-time Tracking: Monitors vendor financials, performance, risks, and payment terms.
• End-to-End Monitoring: Tracks the entire process from purchase requisition to invoice payment.
• Efficiency Identification: Identifies inefficiencies in procurement processes.
• Proprietary Filtering Engine: Uses a filtering and threshold engine to deliver relevant insights for data-driven decisions.

Experience seamless procurement with INSIA. Schedule a demo now to see how our tools turn complex challenges into streamlined, data-driven solutions tailored to your needs.