For your procurement effort to effectively monitor, measure and manage your suppliers, you need to keep specific performance indicators (KPIs) top of mind. These KPIs involve using the right vendors and obtaining the high-quality products you are paying for within the agreed-upon time frame. KPIs promote effective supplier/vendor management by setting appropriate targets, monitoring lead times, and naturally ensuring the quality of what’s delivered.
While looking for ways to improve procurement processes and make them more impactful on the bottom line, it’s essential to monitor three existing quality and delivery KPIs continuously. While there are several KPIs companies use, all of them important, these three will give you a distinct window on receipt of goods, their quality and alert you to whether you are using the night vendors, and they are doing right by you.
KPI #1: Supplier Defect Rate
Supplier defect rate is used to evaluate a supplier’s individual quality. Measuring supplier defect rates and breaking them down based on defect type will offer actionable insights into how quality-conscious, trustworthy and reliable a supplier is and how they can perform to contract.
Supplier defect rate = Number of substandard products/Total number of units tested.
The defect rate can also be determined by dividing the number of defective orders into the total number of orders. Based on the specifications for the product, there are many ways to measure defect rates—from observation to analysis– that tests a percentage of items received. Of course, there could be a 100% test rate if the product is safety critical.
Typically, acceptable quality levels (AQL) represent the worst-case quality level that can be tolerated. The lower the level, the more rigid the specifications. Incoming parts/products are usually tested at random, and if the number of defective items is below the predetermined amount, there is an acceptable quality level (AQL). Defects usually fall under critical flaws that can cause injury or harm, significant faults that could result in failure, and minor imperfections that differ from specifications but don’t necessarily affect the usability of the part/product. Rejects will be reviewed to determine what is causing the defects.
KPI #2: Supplier Lead Time
Supplier lead time starts when the supplier receives an order and when the order is shipped. This is a critical metric regarding stock levels and inventory management. Having a handle on lead time helps the company predict sales and maintain smooth and efficient operations.
By monitoring this KPI:
- Companies can see what, exactly, affects lead time, including production processes.
- Inventory management will be more efficient (if ordering, estimating, and lead times are appropriately maintained).
- The number of suppliers will be significant in estimating delivery times and avoiding stocking excess inventory effectively. Establishing a lead schedule and monitoring it consistently helps keep shipping/receiving costs in line and lead times reduced
As we are painfully aware, it is impossible to predict unavoidable delays caused by major unexpected issues. Maintaining a backup supplier can potentially help when faced with these challenges. Lead times also depend on proper inventory management KPIs.
KPI #3: Vendor Availability
This KPI helps establish the level of reliability an organization can place on a specific vendor. It is measured by the ratio of the number of time items available on a vendor’s side to the number of orders placed with the supplier. Vendor availability can also measure the vendor’s capacity to respond to emergency demands.
Vendor relationships are critical to success, and managing these relationships is an integral part of the strategy. When working with multiple vendors, the complexity of sheer numbers can overshadow proper management. This availability KPI refers to the number of times goods are available to the supplier, or the total number of orders placed.
Knowing that a vendor can provide the goods or services you require when necessary is critical for overall efficiency- 90% or more availability can ensure an uninterrupted supply chain.
How Procurement KPIs are Changing
KPI measurements and tracking is increasingly going digital. Many cloud-based tools are available to help, enabling procurement professionals to spend more time analyzing and reacting to the data obtained. These cloud-based digital procurement solutions to measure KPIs, in addition to providing actionable insights, will mitigate risks and potentially increase profitability.