Top Ten Key Performance Indicators for Successful Spend Analysis
Key Performance Indicators (KPIs) are specific, measurable and actionable values that are identified as important in determining the success or failure of an activity. KPIs vary by activity, but they can also vary for the same activity, depending on what is important at the time. With spend analysis, KPIs may focus on contract adherence one year, and savings the next. Following are the top ten most effective KPIs that you should include in your spend analysis project:
Identify a percentage of actual savings year over year.
2) Cost Reduction
Identify savings from reductions in current costs compared to previous costs.
3) Cost Avoidance
Identify a KPI that measures the amount of money you avoided spending due to unnecessary repairs, replacements or damages.
4) Total Spend Under Management
Identify your goal for total spend under management. 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.
6) Contribution to Total Spend
KPIs can be set to monitor individual item’s contribution to spend, category’s contribution to spend and supplier’s contribution to spend.
7) Contract Pricing and Compliance
Set a KPI to ensure that contract pricing is being maintained.
8) Purchase Price Variance (PPV)
Set a KPI to monitor and manage the purchase price variance between the price paid and the actual price of items.
Set a KPI to ensure that 80% of your spend is through 20% of your suppliers.
10) Supplier Performance
One or several KPIs should be identified to evaluate suppliers’ performance in regards to price, delivery, quality and service.
Using all 10 of these KPIs will ensure that you are getting the most value out of your spend analysis initiative.
How are organizations successfully using spend analysis?
The white paper, Where Spend Analysis Meets the Supply Chain: Putting Big Data in a Procurement Context, discusses how FMC Technologies, a large oil and gas firm, used spend analysis to measure their suppliers’ performance on quality, on-time delivery, open purchase orders, forecasts, and supplier risk.