Tags: Supply Chain
8 Key Metrics for Effective Spend Management
Spend management, the practice of monitoring a company's procurement expenses, is a crucial method for cutting costs and enhancing productivity. To optimize your spend management strategy, it's essential to keep a close eye on your performance. The specific Key Performance Indicators (KPIs) you should focus on can vary from one company to another, depending on individual objectives and operations.
Here are eight impactful KPIs to consider when evaluating the success of your spend management strategy:
Sales Revenue: Assess the performance of your spend management strategy by examining your savings. Calculate your purchasing spend as a percentage of your sales revenue. You can do this on an annual basis or, if you lack yearly data, calculate it month over month.
Supplier Spend: Supplier management is pivotal in understanding your organization's total spend. Gather data on your spending with each supplier. Are you adhering to the 80-20 rule (where 80% of your suppliers account for 20% of your spend)?
Supplier Performance: Evaluate supplier performance to ensure you are maximizing their potential. Analyze the number of suppliers you use and consider opportunities for consolidation. Expert supplier management can identify cost-saving prospects and efficiency enhancements.
Cost Reduction: Calculate cost reduction as the purchase price minus the last price paid. This reveals areas where you can eliminate expenditures to achieve additional savings by removing unnecessary goods or services.
Cycle Time: Monitor purchase order cycle time, a vital metric in spend management. Understanding the time it takes for goods or services to reach end-users helps identify areas for efficiency improvements.
Cost of Order: Keep a close watch on the cost of each order. This practice maintains accurate order data, reveals price fluctuations, and improves cost forecasting for the future.
Cost Avoidance: Cost avoidance is calculated as the purchase price minus the price quoted. It measures the money your organization didn't have to spend, whether on repairs or costly replacements.
Return on Investment (ROI): Procurement ROI is calculated by adding cost avoidance and cost reduction and then dividing the result by the cost of managing procurement. ROI helps organizations assess profitability and cost-effectiveness, aiding in predicting future costs and budgeting.
KPIs: An Essential Tool for Success
Whether you're using a third-party provider for spend management or handling it internally, tracking KPIs is essential to gauge the success of your strategy. It's crucial for organizations to define their goals first before selecting the most relevant metrics. We've highlighted various key metrics to consider when taking control of your procurement spend.