There are several different Key Performance Indicators available to measure the performance of a sourcing organization. Traditionally negotiated cost savings are at the top. This could however be a pitfall since the saving might never reach the bottom line of the profit and loss statement. Implementing the negotiated saving is as important as negotiating it and should be an important measurement for all purchasing organizations.

Here are some examples of different KPIs:

1. Negotiated cost reduction savings

2. Implemented cost reduction savings

3. Percentage of total spend under management (contract)

4. Cost avoidance

5. Purchasing ROI = savings/operating costs

6. % of suppliers = 80% of the spend

7. Supplier performance (price, delivery, quality, service, technology, etc)

8. Innovation from the supplier base

9. Contract compliance

10. % of purchasing order

11. % of wild invoices

12. Number of invoices

13. % competitive bidding (%of spend done under competition)

14. Subjective feedback score from internal customers

To select 3 -5 of the above KPIs is a good start and to further enhance the visibility of the purchasing organization’s value is to link the KPIs to the company’s financial goals. E.g: how does the implemented cost saving from purchasing impact the company’s profitability objective? How does it impact the company’s valuation or earnings per share? Putting the purchasing organization’s work into the company perspective, usually has great impact on enhance the understanding and focus of the value the purchasing work provides.

Common pitfalls

- Companies define KPIs that sub optimize the overall company’s performance. E.g: it might not be so that the supplier with the lowest price is best for the company? How does the supplier impact cash flow, inventory and quality?

- Companies usually define functional KPIs only valid for separate functions. Again, this might lead to sub optimizations. Strive for cross functional work and KPI to drive different organizations to work together to reach common objectives

- Purchasing organizations only measure negotiated cost down. Don’t forget about the implementation of the saving. If it isn’t implemented, it is not a saving. The implementation might require a big change effort.

- Companies defines KPIs that are too easy to reach. To drive continuous improvements you must challenge your organization. Define different levels of the objectives for each KPI, e.g: a target and a stretch where the stretch is very challenging to reach. You will be amazed to see how much people can do when challenged a bit.