The procure-to-pay cycle is a highly essential target for continuous improvement and optimization since it encompasses everything from procuring raw materials for production to obtaining goods and services such as utilities, office supplies, and custodial services.
With more visibility into the efficiency and effectiveness of your procurement operations, you can make better decisions and save even more money. However, if you don't track crucial indicators, you're wasting valuable information, missing out on opportunities to lower costs and enhance procurement ROI, and thus losing money due to inefficient workflows.
Measuring the performance of source-to-pay process
It is crucial that businesses have a comprehensive framework to monitor different metrics in the source-to-pay process. In order to do so, organizations all around the world set specific KPIs to measure the performance of their source-to-pay process.
KPIs are business performance indicators that aid in evaluating a company's progress based on actual monitored data. KPIs should never be seen as a goal in itself but rather as a direction that allows changes in your firm to be tracked, analyzed, and evaluated with others in the industry.
In the best-case scenario, assist you in identifying efficiency gaps, detecting hidden expenses, and optimizing your company operations.
Here is how you can use different KPIs to measure the performance of your source-to-pay process and derive value beyond cost savings.
Supplier lead time
The time it takes for a supplier to receive and dispatch an order is known as supplier lead time. This KPI is usually expressed in days. Vendor lead-time begins with confirming the availability and placement of a particular order and concludes with the delivery of products.
According to a research conducted by the American Productivity and Quality Center (APQC), top performers had an average supplier lead time of four days, compared to 11 days for worst performers.
Supplier lead time tells how efficient your supplier is, and it is essential to make decisions based on this metric as more extended supplier lead time can delay your whole supply chain. If the supplier lead time is too long, you might consider looking for another supplier who can deliver products more efficiently.
Supplier quality rating
Supplier selection and relationship management are crucial tasks since suppliers are undoubtedly among a company's finest intangible assets. In this regard, it is critical to guarantee that suppliers maintain a suitable level of performance.
That is a significant procurement KPI to consider when establishing a product's ultimate quality. It calculates the percentage of items received from suppliers that fail to fulfill compliance and quality standards.
Suppliers can be rated based on different quality metrics relevant to an organization. For example, you can rate suppliers based on the number of manufacturing or shipping defects in the deliveries, the packaging of the order, the use of superior raw materials, and so on.
Purchase order cycle time
Purchase order cycle time starts from the moment a purchase requisition is made until it is communicated to a vendor or contractor for order placement. Purchase order cycle time is measured in days and does not include supplier lead time. This KPI is for the whole purchase order cycle, including the end-to-end ordering procedure.
Top performers may make a purchase order in less than five hours. On the other hand, Bottom performers wait roughly 48 hours to place a purchase order, which is more than eight times longer than top performers.
The time it takes for a purchase order to be processed is an essential indicator of procurement cycle time. While measuring this metric, all actions connected with processing a purchase order, such as data entry, time taken to confirm receipt by the supplier, and the time taken to respond with confirmation of pricing and delivery, should be included.
A shorter cycle time implies that your procurement staff is efficient and well-organized.
Percent of transactions processed electronically
This KPI evaluates the percentage of all invoices that can be processed electronically or entirely automatically. This key performance indicator shows how far you and your vendors have progressed toward electronic invoicing.
As a result, the rate of entirely electronically processed invoices is the KPI that helps you understand how far you've progressed in digitalizing procurement in your firm over time. It also indicates how much you are progressing towards cost savings as electronically processed transactions cost one-third of the cost of manually processed invoices.
Percent of total transactions handled by the purchasing department
This is a crucial performance indicator that illustrates how many transactions are manually processed by the purchasing department per day and provides visibility into the competence of purchasing department.
This KPI also tells which personnel requires further training and assistance to properly analyze and assess invoices in a timely manner and see where your AP procedures are strong and need to improve.
The cost avoidance statistic examines the steps to avoid future expenditures and expenses. In contrast to the direct savings assessed by the cost reduction KPI, this metric focuses on the indirect savings that aren't immediately observable or quantifiable in the company's bottom line.
This KPI calculates how much money you saved by avoiding unneeded repairs, replacements, or damages. Consider the savings that may be realized by properly tracking supplies: to prevent having to discard expired goods, maintaining tools: to avoid costly breakdowns, or managing inventories: to avoid overstocking or untimely orders.
It calculates the tangible savings made possible by a variety of cost and procurement management approaches. This KPI is calculated by comparing a product or service's old and new expenses.
You can boost your efficiency over time by keeping a continual eye on cost reduction: keep track of vendor spending and provide forecasts for projects of a given size or duration. Then, for such projects, go deeper into general cost-cutting techniques. You'll learn how to imitate and enhance future procurement savings as time goes on.
The procurement return on investment (ROI) is regarded by many procurement specialists as the most essential procurement KPI. However, it's frequently studied in conjunction with other measures to provide a complete view.
The procurement ROI is calculated by dividing the annual cost savings by the cost of internal procurement. This statistic is best suited for internal expenditure analysis and aids in determining overall profitability as well as the cost-cutting effects of an investment or procurement function.
Organizations can also compare their procurement ROI with industry-standard to determine the value of their procurement investment. For example, according to a study conducted by The Hackett Group, high-performing firms have a return on investment of 9.5 or higher, while others have a return on investment of at least 4.6.
An effective source-to-pay process plays an important role in ensuring that you source the best suppliers at the best rates while maintaining a healthy relationship with them. By measuring the performance of your source-to-pay process, you can identify the areas of weaknesses and discover opportunities to further streamline your process, hence enabling it to increase the profitability of your organization.