Daily Archives: July 10, 2013

Procurement KPIs and Business Acumen – A Review, Part III

Next Level Purchasing (NLP) recently released a new four-part express course on Procurement KPIs and Business Acumen that is available to all premium Next Level Purchasing Association (NLPA) members for free (and to all free NLPA members at a one-time price of 54.99*). In SI’s opinion, this course meets it goals of delivering one of the key lessons a Procurement department needs to master to be seen as strategically contributing to the organization given the current view of Procurement’s role, does a great job of defining business acumen and relating it to a function Procurement should understand well (Sales), and does a deft job of indicating how properly defined synergistic KPIs can generate compound effects and deliver greater results than non-synergistic KPIs. But more importantly, as indicated in Part I, it develops and presents a basic, generic, framework that ties together the key synergistic KPIs for any Procurement organization that can be used by an Procurement Professional. This framework, which is beautiful in its simplicity, is the most innovative encapsulation of a core idea that I’ve seen from a purchasing organization, analyst firm, or consulting organization in years!

That framework, as we mentioned in our last post, is the Procurement Funnel. This funnel, which can be used by any organization to accurately determine it’s contributions that go straight to the bottom line, takes in the universe of total organizational spend and squeezes out the realized savings that Procurement is measured on, just like the Sales funnel takes the universe of potential leads and squeezes out organizational customers. The only difference is while a basic sales funnel can have as few as three tiers, the Procurement funnel requires five tiers.

  • Total (External) Spend
    The total expense incurred by a company over the course of a year. The base definition of total spend would also include things like salaries, etc. that Procurement does not, and will never have, control over (which is why SI believes this top tier should be external spend ).
  • Spend Under Management
    The percentage of spend under the control of the Procurement organization. Should be a significant amount of total (external) spend, but may not be.
  • Addressed Spend Under Management
    How much of this spend the Procurement organization has actively sourced (or has under contract from a previous year).
  • Negotiated Savings
    The year-over-year savings the Procurement organization was able to negotiate on the addressed spend under management.
  • Realized Savings
    How much of this savings was actively captured (and did not get lost in maverick spend).
The Procurement Funnel

This funnel is accurate regardless of the industry your Procurement or Supply Management organization is in, and the four implied synergistic KPIs — % Spend Under Management (SUM), % SUM Addressed, % Savings on Addressed Spend, and % of Realized Savings — are universal. Organizations in different verticals may have different KPIs around New Product Development (Influence), Supplier (Performance) Management, etc., but these spend related KPIs are universal and a great starting point. And improving two or more of these KPIs has a significant compound effect on the bottom line performance of the Procurement / Supply Management organization.

For more details on how to accurately compute each category, compute the KPIs, improve the KPIs, and address the organizational issues that could inhibit your ability to improve the KPIs, take the short course on Procurement KPIs and Business Acumen , which will also help develop your Procurement Acumen, your ability to distinguish KRIs from KPIs, do the math that will help you figure out how to make the greatest impact, and give you some techniques to achieve a higher percentage of cost savings on sourced categories. There’s only so much justice a 3-post review can do to a four-part, fifty-page short course.

* Note that premium NLPA membership is only 99.99 annually and grants you access to all nine express course series (of one or more courses) as well as the full NLPA library. SI would recommend that you consider premium membership if you are interested in multiple resources as it is much cheaper than paying by the drink.

** Internal spend is compensation and controlled by a compensation committee, while external spend, regardless of it’s nature, should be influenced by Procurement.