“You can’t improve what you can’t measure,” wise words spoken by Peter Drucker, prolific author and educator referred to as “the man who invented management.”

When it comes to sourcing for your organization KPIs can streamline your procurement process, move you closer towards your strategic goals, guide decisions on the future needs of your business, and ultimately reach success in your procurement performance management and cost-savings.

Before digging into some KPIs for your procurement department, let’s look at what KPIs are and how they can improve and benefit your business. A procurement KPI, or key performance indicator, can be defined as “a metric used to quantify, report and track the effectiveness and success of the procurement department.” Having access to this readily available information is crucial as the industry becomes more motivated to make data-driven decisions in real time, and benchmark and track costs, efficiency, time, and quality.

Procurement KPIs are typically grouped into the following categories: cost-savings, delivery, inventory, and quality.

12 KPIs that your procurement department should be tracking:

• Defect rate: In industries like aerospace, automotive, and defense, monitoring the supplier defect rate is extremely critical. The defect rate represents the share of defective products a company produces and can be used to determine whether manufacturing, assembly or QA processes require improvement. The metrics that contribute to this KPI are the number of units inspected vs. the number of defective units. The measure of supplier defect rate is usually in terms of defects per million.

• Supplier availability: This KPI measures the supplier’s ability to meet demand and urgent requests, helping businesses to determine their reliability. Supplier availability is measured by the ratio between the number of times items that were/are available on the vendor’s side to the total number of orders placed with the vendor.

• On-time delivery (OTD): Late deliveries cause delays and can be costly. On-time delivery (OTD) KPIs can ensure efficiency of suppliers, as well as customer satisfaction and supplier performance. To calculate or track and measure the on-time delivery rate you must use the total number of deliveries made by the company to the number of delayed deliveries.

• Compliance rate: This KPI ensures that suppliers are compliant with business requirements like delivery time, exclusive discount offers, maximum reaction time in case of delays or issues, payment mode, etc. The compliance rate KPI offers insights into supplier relationships and helps save costs through negotiations with suppliers. The metrics that contribute to this KPI are the ratio of disputed invoices to total invoices for that supplier, and the variation between the price paid and the price quoted. For a mid-size company, an overall compliance rate of 50% is a sensible purchasing KPI goal.

• Lead time: This metric represents the total time for supplier to fulfill an order. The supplier lead times are typically measured in days or weeks and start with the availability confirmation and order, and finishes at delivery. Lead time is the delivery time or date of a good or service subtracted from the original time or date of order.

• Procurement ROI: Procurement ROI is a highly imperative metric that determines the cost-effectiveness and profitability of a procurement investment. With that said, it should not be a stand-alone KPI to measure the overall procurement function performance, as many other KPIs will help show a more complete picture. To find the procurement ROI, you will take the annual cost savings, or the combined cost reduction and cost avoidance, divided by the total annual procurement cost. A high procurement ROI usually means procurement is running efficiently, while a low procurement ROI can indicate a lack of results and need for change in strategy.

• Number of suppliers: To track the dependency level on suppliers, you will want to use this KPI. Relying on few select vendors and not diversifying sourcing creates a risk of dependency and last-minute cancellations by a vendor. In turn, having too many suppliers is also not profitable as the possibility of discounts is reduced.

• Quality rating: Supplier quality rating is one KPI that is essential in assessing supplier performance management. It helps evaluate present and future supplier relationships, as well as quality ratings, corrective measures, and resolution of quality issues.

• Purchase order cycle time: This procurement KPI is measured from the start of order creation, through approval, delivery, invoice generation, and payment; creating a purchase order (PO) cycle. The PO cycle time may vary from hours to days. The suppliers that respond to urgent orders can be identified from the value of this metric. Depending on the value of the cycle time, suppliers may be divided into various categories. An urgent order may be given to a vendor with a short PO cycle time. The overall cost and productivity of the procurement function and staff productivity can be improved by reducing the PO cycle time.

• Inventory Aging: The inventory aging KPI identifies the slowest moving products in a business as well as the accrued costs of warehousing that inventory before purchase. Inventory that sits for long timeframes may need to be either disposed of or discounted, both of which are costly choices. A high level of inventory aging is a tell-tale sign of capital blockage in the form of inventory.

Procurement KPIs must be ever evolving as the needs, demands, and goals for your business progress over time. While cost-savings are an important aspect when measuring procurement KPIs, taking a holistic approach will prove to provide a more value-driven strategy to the success of your procurement department.