Introduction
Procurement, as a function, is an evitable aspect of all business organizations. A procurement process is a series of steps that an organization identifies and follows in order to obtain goods or services for fulfilling its business goals and objectives. So while planning for a procurement, it is critical to foresee and prepare for the execution strategically, which inturn helps to progress through the procurement cycle smoothly, right from placing a requisition till receiving the goods.
Procurement accounts for spending an organization’s revenue on acquiring goods and services and so it has a direct impact on cost savings objectives. Apart from achieving cost savings objectives, an effective procurement process helps an organization to enhance supplier performance, compliance, risk management, contract utilization, and sourcing cycle time.
A well-implemented procurement process enables an organization to secure higher visibility into stakeholder performance. Greater transparency helps organizations enforce higher compliance in terms of costs, quality of goods/services, etc. In order to enforce visibility, transparency and accountability, the organization can use goal setting frameworks like OKRs to track the efficiency of the procurement process. With OKRs, a procurement department can define it’s top priorities, align them with company-level goals or other departmental OKRs, and see great results to reap benefits.
What builds a great procurement OKR? Let’s take a look at 10 excellent examples of procurement OKRs that encapsulate the responsibilities of the procurement department, and also certain KPIs and metrics that must be kept in mind while setting targets and outlining initiatives for procurement. Focus on the listed examples and use them as a starting point to help identify your business priorities and develop OKRs that help you drive progress and positive outcomes in your procurement department.
Procurement Cycle
Description: This measure calculates the number of days required to pay suppliers from the time a purchase order is placed until the time payment is complete. It is part of a set of Cycle Time measures that help companies analyze the duration of the process “procure materials and services” from beginning to end.
#1: Optimize procurement cycle time
Objective
Optimize procurement cycle time
Target Date: Q2-2021
Visibility: All Employees
Key Results
Decrease time taken to create and approve purchase requisition (PR) from 5 days to 3 days
PO Cycle TimeDecrease time taken to create purchase order from 2 days to 1 day
PO Cycle TimeImprove the perfect PO rate from 75% to 80% by next quarter
Perfect PO#2:Reduce the rate of emergency purchases
Objective
Reduce the rate of emergency purchases
Target Date: Q2-2021
Visibility: All Employees
Key Results
Decrease number of unplanned purchase orders from 20 to 15 per month
# of unplanned purchase orderMaintain service level of 98% for every fast moving category to avoid shortages
Service LevelImprove procurement plan by aggregating emergency orders to meet more than 90% of vendor minimum
VMIN order rateProcurement Quality & Compliance
Description: Contractual and policy compliance are pivotal to ensure legal security. If these compliance rates dip down, they can spike up indirect and maverick spend. A foolproof purchasing contract with clearly defined penalties can improve the compliance rate
#3: Improve compliance rate
Objective
Improve compliance rate
Target Date: Q2-2021
Visibility: All Employees
Key Results
Reduce the ratio of disputed invoices to total invoices from 21% to 10%
Dispute RatioControl the difference of price paid and the price invoiced for every vendor not more than $5000 every month
Dispute RatioImprove vendor availability from 90% to 98% to measure a vendor’s capacity to respond to emergency demands
Vendor availability#4: Improve quality process
Description: By ensuring that the purchased products are of a specific quality, as defined by the quality standards, the purchasing department is ensuring that the quality of the products for customers is maintained.
Objective
Improve quality process
Target Date: Q2-2021
Visibility: All Employees
Key Results
Reduce the number of defective items per thousand from 4 to 2 for every receipt
# of defective items Streamline QA process by increasing certified vendors (100% OTIF fulfilment for 3 months continuously) from 10 to 25
# of certified vendorsIncrease the RMA % from 90% to 95% for all products failing quality standards
RMA %#5: Improve supplier performance to fulfil the order
Description: Vendor performance management refers to the monitoring and analyzing of the reliability, quality, and performance of the org’s vendors. It helps to boost efficiency and profits, reduce stock levels and inventory costs, and improve (both internal and external) customer satisfaction
Objective
Improve supplier performance to fulfil the order
Target Date: Q2-2021
Visibility: All Employees
Key Results
Improve the fill rate of A category suppliers from 98% to 99%
Fill rate Reduce the lead time for orders (PO receipt to shipment) from 7 days to 5 days, and not beyond the contractual vendor lead time
Lead TimeImprove the OnTime-InFull rate from 90% to 95%
OTIF#6: Reduce procurement spend
Objective
Reduce procurement spend
Target Date: Q2-2021
Visibility: All Employees
Key Results
Rationalize supplier base from 5 to 3 per category
Supplier base Improve the discount rate from 2% to 5% for monthly order value > $10000
Vendor DiscountIncrease the pay term period from 14 days to 21 days
Pay Term Period#7: Optimize the procurement cost to get better prices by controlling the total cost of ownership
Description: Cost savings remains a fundamental, pivotal metric to measure the success of the procurement function. Consider the time value of money to optimize procurement strategy and increase the cost savings
Objective
Optimize the procurement cost to get better prices by controlling the total cost of ownership
Target Date: Q2-2021
Visibility: All Employees
Key Results
Maintain the total cost of ownership (e.g., delivery costs, supplier management, life cycle costs, etc.) between 5%-10% of the total inventory cost
TCOReduce maverick spend in procurement from 5% to 1%
Maverick spend Increase discounts through payments on time from $100,000 to $200,000
Discount Cost #8: Implement process automation to improve efficiency and cost savings
Objective
Implement process automation to improve efficiency and cost savings
Target Date: Q2-2021
Visibility: All Employees
Key Results
Automate PO process to reduce the cost spent per invoice from $8 to $2
Cost per invoiceReduce PO processing time from 1 hour to 30 minutes by adding mobile requisition and approval capabilities
PO Processing TimeIncrease turnaround efficiency in the CCC process from 80% to 95% by reducing manual touchpoints and automating the workflow
Turnaround Efficiency#9: Control every dollar of procurement to be placed under management
Spend under management compares strategic sourcing expenditures on products and services against overall expenditures in a given fiscal period. As an organization’s spend under management rises up, its ability to optimize cost and forecast expense increases with it.
Objective
Control every dollar of procurement to be placed under management
Target Date: Q2-2021
Visibility: All Employees
Key Results
Increase the cost savings from 6% to 12% by ensuring SUM procurement spend dollar is under management (Total approved spend (i.e., direct, indirect, and service-related cost ) – Maverick spend)
SUMIncrease the procurement ROI (Annual cost savings / Annual procurement cost) from 5% to 10%
Procurement ROIIncrease the Spend Under Management score from 7 to 9 for procurement department
SUM #10: Optimize procurement cost of the organization
Description: The procurement cost can be optimized by both cost reduction and cost avoidance
Objective
Optimize procurement cost of the organization
Target Date: Q2-2021
Visibility: All Employees
Key Results
Reduce the cost of labor associated with procurement from $40 to $20
Labor costReduce the overall cost of procurement from $80 to $70 by eliminating the need to hire additional staff
Labor cost Maintain unmanaged spend to be not more than 5% of the total procurement cost
Unmanaged spendConclusion:
Procurement has started its journey towards becoming a long-term strategic function of an organization in contrast to its tactical past. An effective procurement process ensures higher process efficiency at every stage of a procurement cycle in an organization. OKRs can serve as a great starting point to help organizations track a well-structured and effective procurement process.
To stay committed to aligned goals, plan your OKRs with company-level priorities and define dependencies proficiently. Use Profit.co integrations to automate KPI updates, or complete weekly check-ins to make sure you are staying on track. Implementing well-defined and trackable procurement OKRs can help transform the level of progress that you can achieve in your organization.
For more information on how to write great OKRs and to see more examples of OKRs for all your departments, don’t forget to check out our blog!