What’s The Most Useless Commonly Used Procurement KPI?

I'm running a workshop on Proving Your Procurement Value next week in Dubai - coming to London too on December - as part of the Tejari and BravoSolution Real World Procurement series. It was preparing for the session recently that led me to thinking about some of the commonly used procurement key performance indicators, often used either for internal reporting or as a comparator when benchmarking across organisations, and whether they are actually useful. So the question is this, and we'd love to get some views from readers.

What do you think is the most useless - or indeed, positively harmful - measure that is commonly used?  That might include personal KPIs or targets that were counter-productive, or departmental examples that failed to achieve their objective. We're going to feature a few of our "favourites" (if that is the right word) over coming weeks as we approach that London workshop.

So our first candidate is "Number of suppliers per £ million third-party spend".  This is usually used in that format as a benchmark across organisations, looking at how our organisation is doing against  peers or competitors. Or it can be an more internally focused KPI, when it may well be linked to reducing that number and therefore is basically about reducing the number of suppliers used.

Whether it is used as a benchmark or for internal purposes, both are fraught with issues. The most basic point is that every organisation is different, and that the objective of procurement is surely to have the appropriate number of suppliers for the specific organisation. That number is not necessarily fewer than we have now (or indeed more). Comparing across organisations is only even vaguely relevant if you stick to very similar firms, but even here, the metric does not really answer that point of appropriateness.

Two firms might each have revenues of £100 million. One has 100 suppliers, the other has 5,000. We might intuitively feel that 5,000 is a lot, but equally, 100 sounds low. But the number will vary around points such as whether a bundled outsourcing strategy has been pursued - perhaps one firm puts all their contingent labour spend though a single MSP-type supplier, and has a single TFM deal for all facilities management across the business. The other does not. Who is to say one is right and the other wrong? But the KPI will look very different for each firm.

Another example - the auto companies have driven considerable supplier reduction over the years - now we see cases like the recent VW shutdowns, caused by too much dependence on a few suppliers. Indeed, in any spend category you care to name, there are tricky issues to face if we want to define the optimum number of suppliers.

Now if you do a proper analysis, across spend or within a category, and decide logically that you have too many suppliers, explain why and plan for a structured and thought-out reduction programme, then that's fine. You can use the metric. But we've rarely seen that happen - it just tends to be "we want to reduce suppliers" or "we need to have one supplier per £1 million on average, not per £000". That may be the right move - but you need to understand why and indeed how you will achieve it.

The drive to reduce supplier numbers has also been in part responsible for some misguided "tail spend management" strategies, on both the buyer side and even for solution providers (see the demise of Xchanging as a procurement solutions force, for example).  I know one huge firm where all small marketing services providers must go through an intermediary, which seems to have no benefits or added value at all for anyone, other than it enables the CPO to say they have reduced supplier numbers.

So there we have it - a truly rubbish KPI. And we'll be back with more.

Voices (7)

  1. RJ:

    Sure it’s been mentioned here before but surely “Cost of Procurement Dept as a % of turnover/spend/staff costs”.

    In various guises I’ve seen this used by “leading” benchmarkers of Procurement and I really can’t see what relevance it has. The assumption seems to be that “best practice” is to keep this number low but by that standard, not having a Procurement Department at all will always be the best practice answer. And even if it isn’t, then how can you benchmark an organisation that primarily buys large scale capital projects or equipment (say an oil and gas firm or an airline) against another that has hundreds of small-scale projects. Nonsense!

    A bit trite as well, but surely “savings vs. budget” is also pretty rubbish as a measure. It either says your budget setting process is awful or makes Procurement’s task almost impossible.

    1. bitter and twisted:

      I also hate “cost per PO” (Cost of Dept/no. of POs) . Surely its the marginal cost of an extra PO that matters.

      1. RJ:

        Not sure why this would matter at all – marginal or otherwise. I’d definitely be worried if the cost of raising a major IT development contract were being compared with that of a stationery requisition.

  2. Christine:

    I worked at a London local authority once which tracked the number of Visa cards issued as a “good indicator” – as if the mere issuance of a purchasing card meant that the purchases made on it would be a) useful and b) good value for money.

  3. bitter and twisted:

    “Time taken to place PO ”
    (NB: not ‘time to conclude order’ or ‘requisitioner getting what they wanted when they wanted it’)

  4. Bob Dgte:

    Reduction of annual budget spend resulting from lowest price policy rather than value for money selection … if this can be readily tracked and measured?

  5. Sam Unkim:

    Once that headline, gets a definitive answer, the NHS will be wanting to use it

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