As a Chief Procurement Officer (CPO), your role is crucial to the success of your organization. You are responsible for ensuring that your company’s procurement processes are efficient, effective and cost-effective. To measure the success of your procurement efforts, it is important to track key performance indicators (KPIs). A procurement KPI or metric is a measurable value that tracks all relevant aspects of obtaining or buying goods and services. These KPIs enable the procurement department to control and optimize the quantity, quality, costs, timing and sourcing of purchasing processes.

10 procurement KPIs driving CPO’s success

1. Procurement ROI: This KPI measures the return on investment for procurement initiatives, indicating the financial benefits of procurement activities compared to their costs. Used in relation to key internal stakeholders.
2. Cost Savings: Or Cost reduction, this KPI measures the amount of money saved by the procurement department through strategic sourcing, supplier negotiations, and other cost-reduction initiatives. Used as a driver for tactical buyers to have a strong cost focus.
3. Payment Terms: This KPI measures the average time it takes to pay suppliers after receiving an invoice, indicating the share days that supplier finance you required operating capital. 
4. Supplier Performance: This KPI measures the quality of goods and services provided by suppliers, including delivery times, adherence to specifications, and customer service. Indicate the efficiency of the supply chain. The better average performance, the less disturbances and less resources required to manage supply chain.
5. Supplier Acceptance of Code of Conduct: This KPI measures the percentage of spending that goes supplier that signed on Code of Conduct. Should be 100%. Multiple other possibilities to measure on a more detailed level.
6. Automatic POs issued: Indicate the share of the operative buyers work that has been transferred to be automatically managed by ERPs.
7. Inventory Turnover: This KPI measures the rate at which inventory is sold and replaced, indicating how efficiently inventory is being managed. Could be considered outside the responsibility of a the Procurement department but building a flexible supply chain support a higher turnover and less operating capital tied in stock.
8. Order Fill Rate: This KPI measures the percentage of customer orders that are fulfilled on time and in full, indicating how well procurement is meeting customer demands. Build credibility in connection to KPI Inventory Turnover. 
9. Spend Under Management: This KPI measures the percentage of total spend that is actively managed by procurement, indicating the level of control over spending.
10. Cost of Goods Sold (COGS): This KPI measures the direct costs of producing and delivering goods or services, providing insight into the overall profitability of procurement activities.

Selecting the Right KPIs to Align with Your Company’s Operations and Strategy

As a Chief Procurement Officer (CPO), one of your primary responsibilities is ensuring that your procurement strategy is not only effective and efficient but also aligned with the company’s broader operational goals and strategic vision. Key Performance Indicators (KPIs) are instrumental in this endeavor, serving as a compass to guide your team’s efforts and measure success. However, not all KPIs are created equal, and the selection of these metrics must be tailored to reflect your specific company’s operations and strategic objectives when selecting 10 procurement KPIs that drive a CPO’s success in your company.

Understanding Your Company’s Strategic Objectives

Before finding the 10 procurement KPIs that drive a CPO’s success in your organization, you must have a profound understanding of what your company aims to achieve. Are you looking to drive innovation, expand market share, enhance sustainability, or improve cost efficiencies? Each strategic goal may require a different set of KPIs to accurately measure progress. For instance, if your company is prioritizing sustainability, you might focus on KPIs related to green sourcing percentages or reductions in the carbon footprint of your supply chain.

Analyzing Operational Nuances

The nature of your company’s operations – whether it’s manufacturing, services, or technology – will influence the KPIs you select. A manufacturing firm might prioritize inventory turnover and supplier lead times, while a service-based company could focus on procurement cycle times and contract compliance rates.

Tailoring KPIs to Company Needs

To ensure that KPIs are truly indicative of performance, they should be S.M.A.R.T. – Specific, Measurable, Achievable, Relevant, and Time-Bound. Here are some steps to tailor KPIs to your company’s needs:

• Specificity: Choose KPIs that are directly related to your procurement activities and can be clearly defined and quantified. Vague metrics will not provide the actionable insights you need.
• Relevance: Ensure that each KPI is aligned with both procurement objectives and the company’s strategic goals. Irrelevant metrics may lead to misdirected efforts and resources.
• Integration: KPIs should be integrated with other business systems and processes for a holistic view of performance. For example, procurement KPIs should align with financial performance indicators to provide a complete picture of how procurement activities impact the bottom line.
• Benchmarking: Where possible, benchmark your KPIs against industry standards or past performance to set realistic and challenging targets.
• Feedback Loops: Establish mechanisms for regular review and feedback on KPIs to ensure they remain aligned with changing company strategies and market conditions.

Examples of Strategically Aligned KPIs

• For cost leadership strategies: focus on KPIs like cost savings, cost avoidance, and total cost of ownership.
• For quality-focused companies: prioritize KPIs related to supplier quality, defect rates, and return rates.
• For innovation-driven firms: look at KPIs around the percentage of spend with strategic suppliers, supplier innovation contributions, and time-to-market for new products or features.
• For customer-centric operations: consider KPIs like on-time delivery rates, order accuracy, and supplier responsiveness.

The Impact of KPI Selection on Operations and Strategy

The KPIs you choose will direct the actions and priorities of your procurement team. Selecting KPIs that are not in harmony with your company’s strategic direction can lead to misalignment, where procurement is effectively operating in a silo, disconnected from the company’s core objectives.

Summary 10 procurement KPIs that drive a CPO’s success

By tracking 10 procurement KPIs that drive a CPO’s success, CPOs can gain valuable insights into their procurement processes, identify areas for improvement, and make data-driven decisions to drive success for their organizations. These metrics can also help demonstrate the value of procurement to key stakeholders, including executives and board members.

The art of selecting the right KPIs requires a deep dive into your company’s strategic plans, a clear understanding of your operational realities, and an appreciation for the unique impact procurement has on the organization. By carefully selecting KPIs that resonate with your company’s heartbeat, you can ensure that procurement not only supports but actively drives the company towards its strategic milestones. Remember, the KPIs you choose will not only measure success—they will define it.

Learn more in EFFSO’s course about Sourcing KPIs. The course will give you an introduction to Sourcing Key Performance Indicators (KPI). Also the course will review how to follow up KPIs.

About EFFSO

Get unbeatable procurement results! EFFSO’s extensive experience in procurement enables organizations to achieve concrete results. Regardless of the challenge!

EFFSO is a leading procurement consultancy in the Nordics, passionate about procurement excellence and change management. Since 2007, they’ve offered expert management consulting services in procurement, including spend analysis, potential assessment, category management, and more. EFFSO’s experienced consultants manage everything from category projects to coordinating major transformations for procurement functions. They focus on developing procurement operations to achieve tangible results, enhancing the value of procurement in organizations. EFFSO also values nurturing procurement talent, offering great development opportunities and a friendly workplace.

About Learn How to Source

Learn How to Source (LHTS) is an online platform based in Sweden, offering a range of procurement courses accessible globally. It serves as a community where procurement experts share their knowledge through online courses, designed for various experience levels from introductory to expert. Courses are concise, about 30 minutes each, and cover different aspects of procurement, tailored for different buyer roles. The courses focus on practical knowledge, presented by seasoned professionals, and includes quizzes and certificates. They can be accessed from any device, emphasizing microlearning for flexibility and efficiency.

Note: Illustration of “10 procurement KPIs that drive a CPO’s success” is created by CHAT-GPT on September 15, 2024.