Top Ten Key Performance Indicators (KPIs) for Successful Spend Analysis
- Spend Analytics
One of the biggest steps in developing a more strategic approach to procurement (and spend analytics) is setting KPIs.
Key Performance Indicators (KPIs) are specific, measurable and actionable values that are identified as important in determining the success or failure of an activity. Basically, they measure your performance on a specific metric.
KPIs will, by their nature, vary by activity, job role or process. But they can also vary for the same activity depending on what is important at the time. Changes in situation can result in changes in priority, which of course impacts KPIs. But even if they might shift down the line, setting and tracking spend analysis KPIs is essential for procurement teams to get spend under control.
Identifying Your Spend Analysis KPIs
Spend analysis KPIs can be tricky to identify. Within spend analysis, KPIs may focus on contract adherence one year, and savings the next. Differences in industry, size, annual spend, geography and more should all inform what areas you focus on. While no two organizations will want to follow the exact same metrics, there are some general best practices that spend management teams should use as a starting off point. We’ve assembled ten of them here so that you can set off on the right foot.
This one is pretty straightforward, and maybe a little bit obvious, so we put it at the top of the list. If you want to measure how effective your strategies are, you need to identify a percentage of actual savings year over year. If you don’t have a year of data to measure yourself against, it’s okay to look at savings month over month, but be sure to account for seasonality, especially fluctuations that are specific to your industry.
2) Cost Reduction
Cost reduction is a little bit different from savings. While cost savings look at ways to reduce the price of goods and services, cost reduction focuses on eliminating unnecessary expenses by actually cutting those goods and services. Identify reductions in current expenses compared to previous expenses that are generated by reducing goods and services.
3) Cost Avoidance
Cost avoidance is equally important, especially for organizations that are in manufacturing, retail, life sciences or healthcare. This KPI measures the amount of money you avoided spending due to unnecessary repairs, replacements or damages. Think of savings generated by proper materials tracking (which avoids having to discard expired materials), tool maintenance (which avoids costly breakdowns) or proper inventory management (which avoids overstocking or rushed orders).
4) Total Spend Under Management
Total spend under management is the percent of your organization’s spend that is actively overseen by the procurement department. Identify your goal for total spend under management – and be sure to consider your total addressable spend. Spend under management (SUM) is directly at odds with maverick spend, our next key indicator. When setting your SUM KPI, ask yourself a few questions: does it include direct materials, indirect materials and MRO? Does it include all business units?
5) Maverick Spend
Identify a percentage decrease in maverick spend, or an acceptable level of maverick spend. In almost all cases, you’ll want your maverick spend to be as low as possible. For many procurement teams, maverick spend is the greatest threat to effective strategy because it circumvents the contracts that your team worked so hard to negotiate.
6) Contribution to Total Spend
Contribution to total spend is all about breaking down where your money is actually being spent, across individual items, categories or suppliers. KPIs set to monitor these contributions are invaluable because they allow you to identify savings opportunities. That might mean negotiating a new contract with a high-volume supplier, or consolidating spend around popular items to just one supplier in order to leverage purchasing power.
7) Contract Pricing and Compliance
Contract compliance is absolutely vital to the success of the procurement organization. Set a KPI to ensure that contract pricing is being maintained, both on the supplier side and the buyer side. Suppliers are obligated to give you agreed-upon pricing, and it’s equally important for buyers throughout your organization to be buying on contract.
8) Purchase Price Variance (PPV)
Set a KPI to monitor and manage purchase price variance. PPV is the difference between the prices you’re expecting to pay and the actual cost of items when you purchase them. Variance can come from outdated pricing sheets, changing suppliers, rush orders, inaccurate volume assumptions or other inaccurate predictions. By minimizing PPV, you can more accurately predict expenses and budget more intelligently.
9) Supplier Management
Supplier management is a very broad category, and there are plenty of KPIs you can identify here. To start, we recommend setting a metric to ensure that a certain percentage of your spend is going through a certain percentage of your suppliers. Consider starting by following the numbers given in the Pareto Principle: 80/20. About 80% of your spend should go through about 20% of your suppliers.
10) Supplier Performance
Another supplier management KPI, supplier performance should manage the reliability and consistency of a supplier. This metric should evaluate suppliers’ performance in regards to price, delivery, quality and service. Sometimes supplier performance issues are obvious, but other times they’re intermittent and hard to identify. A KPI can help find weaknesses in your supplier chain so that you can find alternate means of supply.
Fine Tuning your Spend Analysis KPIs
This is by no means an exhaustive list of where you should be measuring your progress. Instead, use this as a jumping-off point and continue to iterate. You may find that PPV isn’t a large problem for your organization, or that the 80/20 rule for suppliers doesn’t fit your business well and you prefer 75/25. The important thing is to set measurements and benchmark against them, then adjust for your particular circumstances.
Comprehensive source-to-pay platforms like JAGGAER ONE make measuring these KPIs much easier, and help streamline your workflows to drive bottom-line savings.