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

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

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