Procurement KPIs For Maximum Cost Savings NOTE: If the audio - PowerPoint PPT Presentation

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Procurement KPI’s For Maximum Cost Savings Charles Dominick, SPSM, SPSM2 President & 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: $1,000 Sales: $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 Used KPI Last Year Improved By 10% # Leads 2,000,000 Conversion Rate 20% # Customers 400,000 Average # 2.5 Transactions/Customer # Transactions 1,000,000 Average Transaction Value $1,000 Sales $1,000,000,000 Pre-tax Profit Margin 15% Pre-tax Profit $150,000,000

How Sales KPI’s Are Used KPI Last Year Improved By 10% # Leads 2,000,000 2,200,000 Conversion Rate 20% 22% # Customers 400,000 Average # 2.5 2.75 Transactions/Customer # Transactions 1,000,000 Average Transaction Value $1,000 $1,100 Sales $1,000,000,000 Pre-tax Profit Margin 15% 16.5% Pre-tax Profit $150,000,000

How Sales KPI’s Are Used KPI Last Year Improved By 10% # Leads 2,000,000 2,200,000 Conversion Rate 20% 22% # Customers 400,000 484,000 Average # 2.5 2.75 Transactions/Customer # Transactions 1,000,000 1,331,000 Average Transaction Value $1,000 $1,100 Sales $1,000,000,000 $1,464,100,000 Pre-tax Profit Margin 15% 16.5% Pre-tax Profit $150,000,000 $241,576,500

How Sales KPI’s Are Used KPI Last Year Improved By 10% # Leads 2,000,000 2,200,000 Conversion Rate 20% 22% # Customers 400,000 484,000 Average # 2.5 2.75 Transactions/Customer # Transactions 1,000,000 1,331,000 Average Transaction Value $1,000 $1,100 Sales $1,000,000,000 $1,464,100,000 Pre-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 Used KPI Last Year Improved By 10% Total Spend $1,000,000,000 % Spend Under Management 60% Spend Under Management $600,000,000 % Spend Under Management 50% Addressed Addressed Spend $300,000,000 % Savings For Addressed 2% Spend Negotiated Savings $6,000,000 % Compliance 75% Realized Savings $4,500,000

How Procurement KPI’s Can Be Used KPI 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 50% 55% Addressed Addressed Spend $300,000,000 % Savings For Addressed 2% 2.2% Spend Negotiated Savings $6,000,000 % Compliance 75% 82.5% Realized Savings $4,500,000

How Procurement KPI’s Can Be Used KPI 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 50% 55% Addressed Addressed Spend $300,000,000 $363,000,000 % Savings For Addressed 2% 2.2% Spend 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 Used KPI 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 50% 55% Addressed Addressed Spend $300,000,000 $363,000,000 % Savings For Addressed 2% 2.2% Spend 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 Improved KPI 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 50% 50% Addressed Addressed Spend $300,000,000 $300,000,000 % Savings For Addressed 2% 2% Spend 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 Improved KPI 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 50% 50% Addressed Addressed Spend $300,000,000 $439,230,000 % Savings For Addressed 2% 2% Spend 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!

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Procurement KPI’s For Maximum Cost Savings Charles Dominick, SPSM, SPSM2 President & Founder, Next Level Purchasing Association