Purchase Cost Control Metrics

Purchase cost control performance can be evaluated using a variety of criteria. A company should be able to determine which of these criteria is related to purchasing cost performance

Providing a product at a lower price than it had before indicates that cost savings have been achieved by taking into account criteria related to suppliers. Of course, reduced costs are expected without any change in the quality of products and services. If the quality of the goods remains the same and the price decreases, we can say that the purchasing performance has improved.

Vendor Rejection Rate & Costs

Review your quality management strategies

Vendor performance metrics such as rejection rate and costs should be regularly monitored to ensure sustainable development of your business. The interdependence between the two notifies you if there are more serious problems, such an increase in both, and if the purchaser can claim new goods or damages in a short period of time.

Communication is also important here to avoid further bottlenecks. It is important to find common grounds and negotiate possible solutions to ensure that the relationship in the future is not harmed by possible claims cases or collateral claims.

Vendor performance KPIs, such as rejection rate and costs, provide actionable information regarding the internal quality management strategy. The continuous monitoring of these KPIs is essential for sustainable business growth. Associating vendor denial and vendor cost metrics helps analyze both the cause of the increase in measures and the likelihood of looking for a new product for damaged goods in a short period of time.

A significant increase in any of these two measures requires prompt action by the purchaser. Uninterrupted communication between buyer and supplier is essential to negotiating solutions to avoid bottlenecks and ensure healthy vendor relationships.

Regularly monitoring vendor rejection and cost metrics helps avoid unwanted cases for damages or warranty claims. The causes of problems and ways to avoid them in the future can be identified by following these KPIs.

Performance Indicators

Review the rejection rate and your vendor costs to determine what caused them and how you can improve them in the future.

Time and Budget Purchases (Purchases In Time & Budget)

Track your purchase time and budget

Follow-up of budget and time are critical elements in procurement department. A healthy amount of flexibility as well as managing the budget should be considered when analyzing purchasing performance measurements.

The average percentage of purchases in time and budget is 81 percent. This, in turn, is actually a pretty good result. Therefore, in order to further develop this metric and apply it at your own company, it may be logical to look at different options and pinpoint areas where the values are much lower.

The procurement manager always needs to be updated about the purchase time and budgets. It is critical for the procurement department that the purchases be completed within the projected time and that the expenditure is within the budget. Monitoring this KPI helps procurement managers identify gaps in the supply line and in the use of resources.

By tracking this KPI, the percentage of purchases over time and budget can be determined. A high percentage of purchases outside the projected time and budget are a cause for concern for the procurement specialist. Analysis of how and why the purchase budget KPIs are not met will help the expert to arrange or review the purchase plan.

Performance Indicators

The goal, of course, is to stay on budget and on time. If you fail to achieve your goal, it’s time to go deeper and find out why.

Cost of Purchase Order

Check your internal costs arising from purchases

Cost of the purchase order is one of the disputed procurement KPIs as definition and implementation vary. Theoretically, this metric represents the average costs of processing an order from the purchase process to the closing of the invoice.

So when you measure that metric, what you decide to consider is: what is the average cost for processing a purchase order based directly or indirectly on how long it takes by the related employee.

The KPI definition and implementation of purchase order cost may vary for each business. A broad definition of the cost of the purchase order is the average cost of purchasing an order until the purchase, creation, and invoice settlement. Practically speaking, the measurement of this KPI involves tracking several variables.

Each business comes with a different variable list that determines the cost of the purchase order. Some take into account direct and indirect costs, others may only consider direct costs and the time each order takes. It is important to understand the essence of tracking purchase order cost metrics; this is to increase the efficiency of the purchase life cycle and to keep errors and costs to a minimum. After understanding the purpose of measuring this KPI, businesses can decide which variables to consider in order to measure it.

Performance Indıcators

The idea is to increase the efficiency of the purchase-pay cycle to avoid mistakes and reduce costs

Reduction of Procurement Cost Reduction

Facilitate cost savings

The cost reduction metric is an example of procurement key performance indicators focused on the cost of the procurement function.

Reducing procurement cost KPI helps procurement managers’ procurement function to facilitate tangible cost savings. This KPI measures percentage cost savings per order through price interviews. Cost savings through negotiations and discounts over the years prove the effectiveness of the cost management measures monitored by the purchasing department.

Advancing purchasing processes through a certain e-procurement platform ensures measurable cost savings. More transparent and clear spending will help you control the costs.

The decrease in procurement cost can be measured by comparing old costs for the same goods or services to the new (revised) costs. A clearer picture of cost reduction can be achieved by categorizing among the various supplier categories and following the best savers. This KPI helps procurement to streamline and optimize the supplier lifecycle, educate and train personnel on cost-saving measures, and drive efficiency by implementing supply chain analytics. Senior management relies on cost reduction metrics to build a long-term cost management strategy.

Expectations from suppliers should be created as standard when purchasing. All requested documents and information can be collected from each supplier quickly and easily. This way, you can save time and make money more easily. Building the supply cycle in the best way will save you financial.

Streamline supplier lifecycle management, improve productivity with supply-chain analysis, or educate your staff on how to save costs. These training programs will carry you a few steps further in your purchasing processes.

Performance Indicators

Observe the cost reduction over time to increase your earnings over the longer term.

Procurement Cost Avoidance

Avoid possible extra costs in the future

The last of our purchase measures is focused on actions that are taken to reduce potential future costs, such as replacing parts before they fail and inevitably damaging other parts. Sometimes they are referred to as "soft saving" in opposition to the "hard" ones, because they do not appear directly on the bottom line in a measurable way, but they can still have a positive effect.

Senior management does not usually pay attention to this metric since it is not visible on the organization's income statement. Strategic expenditures such as new investments or technologies that have no basis for comparison can be edited using this metric.

The best way to use this metric is to develop a strategy for internally mapping cost avoidance and combine it with cost reduction metrics to avoid unnecessary future costs. An effective cost-avoidance strategy would be to enter into long-term contracts that protect the business from future price fluctuations.

Performance Indicators

Develop a strategy to internally map and combine cost avoidance with cost reduction to avoid future extra costs.

Spend Under Management

Track and optimize your spend

Managed spending is one of the procurement cost-saving strategies under management. Essentially, it includes strategically managed expenses covering proportions determined by your preferred suppliers, contracted expenses to get contracts into a procurement system, and control systems to make sure people are actually using the negotiated prices.

This purchase KPI can be categorized as a management KPI. The expenditure being managed strategically, including rates established by suppliers and control systems that ensure the use of agreed prices is covered by management KPI. When evaluating this metric, including the above spend categories enable businesses to realize significant unrealized cost savings.

Management needs to regularly analyze expenditures, evaluate suppliers, and review contracts to identify strategic and operational savings. Consolidating purchases and negotiating bulk discounts can result in substantial savings.

If you consider all these elements when evaluating this metric, you will unlock overly potential for unrealized savings. Regular spend analyzes, supplier assessment and contract reviews are critical to determine operational and strategic savings.

Performance Indicators

Make sure similar $200 products are not purchased 200 times per year but combine them, negotiate a volume discount and save countless dollars.

Procurement ROI

Determine the profitability of your investments

Procurement ROI is one of the most important metrics that determine the cost-effectiveness and profitability of the procurement investment. This metric is valuable for internal analysis of the procurement function. Even though it is an important KPI, return on purchase investment cannot be considered on its own in order to get a full picture of the performance of the purchasing function. It must be associated with other KPIs to get the full picture of the performance. This metric does not take cost avoidance metric into account. Identifying a 10x acquisition ROI of internal investments is a good buying strategy

To calculate the procurement ROI, you must divide the annual cost savings by the cost of internal procurement per year, expressed as a rate. This is a good single metric but it does not necessarily speak for the larger "procurement scorecard" and does not include cost avoidance. Also, if investment in purchasing is very low, you are more likely to measure essentially difficult cost savings.

The list of key performance indicators of procurement that each entity uses to assess performance can vary based on the size and type of business. P2P follow-up from supply to payment offers a huge potential for value added and cost savings. The P2P cycle covers tasks from sourcing raw materials to receiving goods/services such as storage services, office supplies, and utilities. Monitoring P2P KPIs enables increased efficiency and cost savings in procurement and accounts payable processes.

Performance Indicators

The procurement ROI should have a large payback and it is a good target for the procurement department to set it up 10x more than the internal investments.

Cost per Invoice and Purchase Order Number (Cost per invoice and PO)

Cost-saving KPIs: Save

This procurement KPI represents the average cost of processing an order from order creation to invoice closing.

The cost per purchase order varies based on various factors and varies from one organization to another. For example, a company that uses manual methods to process invoices might have higher processing costs than a company that uses automated procedures.

Cost spent per invoice and purchase order can vary from one organization to another depending on the factors included in this calculation. An entity that follows a manual approach will have higher processing costs compared to other organizations that use an automated process.

Performance Indicators

Build a system that evaluates the quality of your invoice and purchase orders. Set clear goals and track the performance of your purchases in detail.