Procurement KPI’s For Maximum Cost Savings

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Procurement KPI’s For Maximum Cost Savings

Charles Dominick, SPSM, SPSM2President & Founder, Next Level Purchasing Association

Think Outside The Box

Think Outside The Box

KPI’s Defined

Key Performance Indicators (KPI’s): Statistics that measure how well a business is performing in the areas that are the most critical to its overall success

How do you react to the “more cost savings” edict?

“The Sales Funnel”

Sales KPI’s

• # of Leads• Conversion Rate

• Average # Transactions/Customer

• Average Transaction Value

• Pre-tax Profit Margin

Sales KPI’s

• # of Leads: 2,000,000• Conversion Rate: 20%

• Average # Transactions/Customer: 2.5

• Average Transaction Value: $1,000

• Pre-tax Profit Margin: 15%

Sales KPI’s

• # of Leads: 2,000,000• Conversion Rate: 20%# Customers: 400,000• Average # Transactions/Customer: 2.5# Transactions: 1,000,000• Average Transaction Value: $1,000Sales: $1,000,000,000• Pre-tax Profit Margin: 15%Pre-tax Profit: $150,000,000

Procurement KPI’s• Total Spend• % Spend Under Management

• % of Spend Under Management Addressed

• % Savings For Addressed Spend

• % Compliance

Procurement KPI’s• Total Spend: $1,000,000,000• % Spend Under Management: 60%

• % of Spend Under Management Addressed: 50%

• % Savings For Addressed Spend: 2%

• % Compliance: 75%

Procurement KPI’s• Total Spend: $1,000,000,000• % Spend Under Management: 60%Spend Under Management: $600,000,000• % of Spend Under Management

Addressed: 50%Addressed Spend: $300,000,000• % Savings For Addressed Spend: 2%Negotiated Savings: $6,000,000• % Compliance: 75%Realized Savings: $4,500,000

How Sales KPI’s Are UsedKPI Last Year Improved By 10%# Leads 2,000,000Conversion Rate 20%# Customers 400,000Average # Transactions/Customer

2.5

# Transactions 1,000,000Average Transaction Value $1,000Sales $1,000,000,000Pre-tax Profit Margin 15%Pre-tax Profit $150,000,000

How Sales KPI’s Are UsedKPI Last Year Improved By 10%# Leads 2,000,000 2,200,000Conversion Rate 20% 22%# Customers 400,000Average # Transactions/Customer

2.5 2.75

# Transactions 1,000,000Average Transaction Value $1,000 $1,100Sales $1,000,000,000Pre-tax Profit Margin 15% 16.5%Pre-tax Profit $150,000,000

How Sales KPI’s Are UsedKPI Last Year Improved By 10%# Leads 2,000,000 2,200,000Conversion Rate 20% 22%# Customers 400,000 484,000Average # Transactions/Customer

2.5 2.75

# Transactions 1,000,000 1,331,000Average Transaction Value $1,000 $1,100Sales $1,000,000,000 $1,464,100,000Pre-tax Profit Margin 15% 16.5%Pre-tax Profit $150,000,000 $241,576,500

How Sales KPI’s Are UsedKPI Last Year Improved By 10%# Leads 2,000,000 2,200,000Conversion Rate 20% 22%# Customers 400,000 484,000Average # Transactions/Customer

2.5 2.75

# Transactions 1,000,000 1,331,000Average Transaction Value $1,000 $1,100Sales $1,000,000,000 $1,464,100,000Pre-tax Profit Margin 15% 16.5%Pre-tax Profit $150,000,000 $241,576,500

That’s a 61% increase in Pre-tax Profit!

How Procurement KPI’s Can Be UsedKPI Last Year Improved By 10%Total Spend $1,000,000,000% Spend Under Management 60%Spend Under Management $600,000,000% Spend Under Management Addressed

50%

Addressed Spend $300,000,000% Savings For AddressedSpend

2%

Negotiated Savings $6,000,000% Compliance 75%Realized Savings $4,500,000

How Procurement KPI’s Can Be UsedKPI Last Year Improved By 10%Total Spend $1,000,000,000 $1,000,000,000% Spend Under Management 60% 66%Spend Under Management $600,000,000% Spend Under Management Addressed

50% 55%

Addressed Spend $300,000,000% Savings For AddressedSpend

2% 2.2%

Negotiated Savings $6,000,000% Compliance 75% 82.5%Realized Savings $4,500,000

How Procurement KPI’s Can Be UsedKPI Last Year Improved By 10%Total Spend $1,000,000,000 $1,000,000,000% Spend Under Management 60% 66%Spend Under Management $600,000,000 $660,000,000% Spend Under Management Addressed

50% 55%

Addressed Spend $300,000,000 $363,000,000% Savings For AddressedSpend

2% 2.2%

Negotiated Savings $6,000,000 $7,986,000% Compliance 75% 82.5%Realized Savings $4,500,000 $6,588,450

How Procurement KPI’s Can Be UsedKPI Last Year Improved By 10%Total Spend $1,000,000,000 $1,000,000,000% Spend Under Management 60% 66%Spend Under Management $600,000,000 $660,000,000% Spend Under Management Addressed

50% 55%

Addressed Spend $300,000,000 $363,000,000% Savings For AddressedSpend

2% 2.2%

Negotiated Savings $6,000,000 $7,986,000% Compliance 75% 82.5%Realized Savings $4,500,000 $6,588,450

That’s a 46% increase in Realized Savings!

If Just “Compliance” Was ImprovedKPI Last Year Improved By 10%Total Spend $1,000,000,000 $1,000,000,000% Spend Under Management 60% 60%Spend Under Management $600,000,000 $600,000,000% Spend Under Management Addressed

50% 50%

Addressed Spend $300,000,000 $300,000,000% Savings For AddressedSpend

2% 2%

Negotiated Savings $6,000,000 $6,000,000% Compliance 75% 100%Realized Savings $4,500,000 $6,000,000

If Just “% Spend Under Management” Was ImprovedKPI Last Year Improved By 10%Total Spend $1,000,000,000 $1,000,000,000% Spend Under Management 60% 87.846%Spend Under Management $600,000,000 $878,460,000% Spend Under Management Addressed

50% 50%

Addressed Spend $300,000,000 $439,230,000% Savings For AddressedSpend

2% 2%

Negotiated Savings $6,000,000 $8,784,600% Compliance 75% 75%Realized Savings $4,500,000 $6,588,450

How To Improve % Spend Under Management• Requires “vertical” influence• Demonstrate results to earn

management’s confidence• Show how other companies address non-

traditional spend via procurement

How To Improve % Spend Under Management Addressed• Requires increased productivity• Process improvement• Better-trained staff• Productivity improvement tools• More people• Utilize external resources (GPO’s,

consultants, etc.)

How To Improve % Savings For Addressed Spend• Better-trained staff (especially for

negotiation)• Cost savings tools (eSourcing)• More advanced practices (value analysis,

supplier collaboration for cost take-out, etc.)

• Cooperative buying

How To Improve % Compliance• Requires “horizontal” influence• Appeal to budget holders:

– Get more out of their budget– Have their people focus on core competencies– Compare compliance between departments

• Bottom line: procurement department has to be the best department at procurement!

Summary• Maximizing cost savings isn’t the result of

one thing, it’s the result of many things• Measure those key performance

indicators:– % Spend Under Management– % Spend Under Management Addressed– % Savings For Addressed Spend– % Compliance

• Focus on improving KPI’s and you will improve your bottom line results!

Bring this presentation on-site to your organization!• “Procurement KPI’s For Maximum Cost

Savings” and other on-site seminars are available from Next Level Purchasing!

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Procurement KPI’s For Maximum Cost Savings

Charles Dominick, SPSM, SPSM2President & Founder, Next Level Purchasing Association