Direct cost-saving KPIs

Here you will find essential KPIs that help you to improve your procurement processes. Using some of these KPIs, may help you establish strategies to save on your company costs.

1

Cost savings by increasing the percentage of managed spend within the total spend

This KPI measures the percentage of managed spend compared to the total spend when buying external products and services for the company. In organizations with centralized procurement, managed spend can be calculated as the sum of all spend run by the organization.

How it’s calculated:   % ~ {of managed spend} = 100 * { {Managed spend} / {Total spend} }

The goal of this KPI is to have more spend follow standard procedures, thereby saving on costs.

2

Cost savings by improving the competition among suppliers

For indirect spend, cost savings should be at the top of your agenda since discontinuing supply will not be considered critical to business.

Cost savings can be achieved in multiple ways:

  • Generating higher competition among suppliers. By using benchmarking and comparing supplier participation rate results.
  • Establishing bid rules. It is common to use the three-bid rule – if the request has less than three bids, it has to be run again. You can measure how many requests have three, four or more bids. The goal is to increase the % of higher numbers of bids.
  • Establishing detailed rules and increasing the transparency of indirect purchases to lower maverick spend.

3

Cost savings through direct purchases

Finding the way to save on costs for direct purchases is essential for every procurement organization. However, they are not easily achievable since buying operations are usually highly optimized. There may be hidden risks that can harm delivery or quality and affect supply continuity.

  • Find external product or material suppliers. Example: a lot of companies look for cheaper products/materials from Asian countries. You can calculate the % of strategic supply from Asian countries. Implementation should be done step-by-step, following progress of quality, delivery and % of overall spend. Slowly increase the percentage if no quality or delivery issues arise.
  • Invest extra resources or even buy the strategic supplier company. This should be considered a long-term investment and KPIs should be developed for each case separately since they are unique.
  • Look for replacement products or services. Measure the % of replaced products or services

4

Price paid to price quoted

Focus on making sure the price quoted is the price paid. This can reduce cases of “overpaying” the supplier. Usually indirect spend, primarily services, have lower compliance rates.
A clear policy with agreements and penalties helps to increase the compliance rate and leads to more accurate bidding. The rogue spend will decrease when suppliers know that they are being monitored. Ultimately this lowers the number of extra paid prices.

Indicators to follow:

  • Percentage of disputed invoices to total invoices.
  • Calculate the total difference for ratio of price paid to price quoted.

5

Transparency of procurement processes

Direct savings can be received by reducing maverick costs, which may be up to 20%, and corruption. Both may be difficult to measure. However, the results are easy to notice once processes become transparent. Running RFPs via mail, especially outside the procurement department elevates the risk of paying maverick costs.
Using special procurement software can easily reduce maverick costs.

Indicators to follow:

  • Follow the number of requests run outside the procurement department via mail. Special solutions like DeltaBid eliminate the risk of maverick spend. Aim towards decreasing the number.
  • Improve processes and use benchmarking to identify savings.

6

Percentage of payable invoices without purchase orders

A high percentage of payable invoices without purchase orders is an indication of low competition amongst suppliers, which usually leads to higher product or service costs.

How to reduce:

  • Follow the percentage of purchase orders payable without purchase orders for a period of time. Use benchmarking to follow the differences in costs. Goal: reduce the percentage.

NB! Focusing only on immediate cost savings can lead to low quality or delivery and can interrupt continuity.

KPIs that help you measure ways for receiving indirect cost savings

7

Cost savings through inventory reduction and better inventory management

Inventory reduction leads to less stock, which leads to zero or low financing on inventory and zero or no mark-up. This results in cost savings and lower operational costs.

Indicators to follow:

  • Setting upper and lower norms for each strategic stocked product or material. The KPI should follow the norms on a daily basis and each deviance needs special treatment.
  • Exceeding the upper level increases operational costs. Below the lower end continuity of supply is threatened, which might lead to extra costs.
  • Minimize stocked indirect materials, measured by capacity etc. This improves work capital and lowers inventory management costs.
  • Lower load of stock in inventory leads to more space for other products and lower inventory management costs.

8

Continuity

If your company has interruptions in continuity due to problems, such as a certain geographic locations or industry specific problems, there may be ways to commute these interruptions, which usually then leads to cost savings.
Interruptions in continuity are usually associated with high costs, so your first goal is to avoid them. If that’s not possible, then commute the interruptions.

Indicators to follow:

  • Follow the number of interruptions. Analyze the results and look for ways to improve.
  • Prepare a special spare in case of an emergency. Analyze how it helps to overcome the problem.

9

The quality of direct supply

Improving the quality of direct supply helps lower the cost of the supply. This KPI quantifies the purchase quality of the procurement branch.

Indicators to follow:

  • Agree on special metrics that reveal the quality of direct supply. Reflect the percentage, laboratory experiments, etc. and follow them on daily basis.

Tip: often you cannot negotiate lower prices, but instead try to agree on higher quality within the established price. This will lead to indirect cost savings.

10

Cost savings through improved expiration management

If you are dealing with raw materials and have an expiration problem, such as the food industry, agriculture, chemistry, and IT, then you may find ways for cost savings through lowering the rate of expiring products by better management.

Indicators to follow:

  • The quantity and number of expiring products.
    Goal: lower the number. This can be done through better inventory management, following norms for stocked quantities etc.

11

Cost savings through improving on-time delivery

In some industries, cost savings can be achieved by improving the on-time delivery or products or services. For example: early delivery increases operational costs and late delivery ends in high waiting costs.
It plays a significant role in industries where the strategic supply is usually not stored in inventory (example: in construction).

Indicators to follow:

  • You can follow the behavior of the suppliers, categories, etc.
    Goal: improve the strategic supply’s on-time delivery.
  • If your strategic suppliers have problems related to on-time delivery, you should find ways to improve their behavior, which will then lead to cost savings.

12

Errors in delivered quantities

Higher quantity of delivered items increases operational costs and might result in unplanned inventory storage.
Lower quantity might result in continuity interruptions and higher operational costs since you have to source faster than planned for new stock.

Indicators to follow:

  • Follow the quantity of delivered items. Goal: reduce errors in delivery quantity.
  • Establish and use special agreements and penalties. Goal: follow the results using benchmarking.

Want to check more Cost-saving KPIs?

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Also check out Quality-improving KPIs (download here) and Delivery-improving KPIs (download here).

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