Improving your procurement practices leads to better profits. However, in order to improve, you must first measure.
Key Performance Indicators (KPIs) are a popular, powerful tool for measuring performance in the areas that indicate you are on the path to reaching the objectives you are targeting.
Depending on where you are on your procurement journey, you may want to use some— or all— of these purchasing KPIs. If, for instance, you've just kicked off and want to ensure your endeavors pay out in dividends and deliver a fast procurement ROI, take a look at these 10 critical performance indicators that will help you measure your success.
If you're looking to build a procurement strategy and aren't sure where you should concentrate your efforts, monitoring your KPIs will allow you to understand your starting point and identify which areas have the most potential for improvement.
Without regularly monitoring your performance, you have no way of objectively understanding the effectiveness of your strategy and improvement efforts and may quickly veer off course.
To drive cost savings and improved efficiencies for better financial performance, you must track the metrics that matter the most. Below we get into 13 essential purchasing KPIs you need to be tracking to ensure you're procuring effectively and optimizing your bottom line results.
Aside from saving you money and reducing your overhead costs, your procurement initiatives should have many objectives that both keep your practice safe and save you money.
Following is a well-rounded list of ten KPIs that will help you measure and monitor critical improvement areas and purchasing behaviors, so you can save money, keep your practice safe and safeguard your long-term viability.
Build a successful, scalable procurement process model by keeping a watchful eye on the frequency of purchases, the accuracy of important documents, and adherence to buying policies and formularies.
Keep reading to find out what the KPIs are used to measure, how they impact your dental practice, and how Method may be able to help.
Keeping an eye on the number of suppliers you buy from helps you mitigate your supplier concentration risks by monitoring your level of dependency on suppliers. Relying on too few, or worse, a single supplier for any category heightens your dependency risks.
If a supplier suddenly closes their doors or is unable to deliver for any reason, you risk running out of critical supplies. This is especially important during times of high demand, raw material shortages, or supply chain disruptions, as these issues make it less likely that other suppliers will be able to fulfill your needs and increases your chances of experiencing stockouts.
But buying from too few suppliers may also impact your ability to negotiate. The right mix of vendors will help you create a healthy competitive environment where suppliers realize they need to sharpen their pricing and provide optimum service to secure your business.
Yet, buying from too many suppliers means you may be missing out on leveraging your buying power to drive cost savings. Other KPIs that track supplier performance and (realized) cost savings may help you determine how many suppliers you should have on your active list.
Tip: Method allows you to view your number of active suppliers at any given time simply by logging in to its dashboard analytics.
Order frequency (the number of orders placed within a month) provides insights into your purchasing habits and order workflow.
Efficient procurement processes lower your overhead. Every order you place takes time away from your employees and therefore comes with its own set of labor costs, from placing and tracking the order to receiving and putting away the goods and, finally, paying the invoice.
Batching your orders helps you streamline workflows, improve your procurement efficiencies, and avoid small order fees, additional shipping costs, or other extra expenses. Buying less often also allows you to take advantage of larger order price breaks or special deals for further cost savings. If you already have guidelines for each dental office to order at regular intervals, say once or twice per month, then the order frequency KPI will help you monitor adherence.
If your order frequency is too high, you may need to establish and/or document an official purchasing and inventory management process and train employees. On the other hand, if you already have one in place, it may be time to consider whether it's effective and what's driving the extra ordering.
Tip: Again, with Method's handy dashboard analytics offers, you can get a quick visual of the number of purchase orders placed by the week or month and see which way things are trending.
Invoicing issues are likely much more common than you think and could be unnecessarily increasing your supply costs. If you haven't implemented the three-way-match process, you're potentially paying more than you should. The three-way match process is a financial auditing process that validates all invoice information against the purchase order and delivery receipt prior to issuing payment. Inaccurate pricing, quantity errors, goods received in error, back orders, or damaged items are all issues that may cause an invoice to be issued incorrectly.
Invoice accuracy is an important cost-saving metric that allows you to monitor your suppliers' ability to invoice correctly.
If you see too many issues, it's time to have a talk and start holding your suppliers accountable. On the other hand, if you don't see any, it's time to wonder if you have a foolproof system for detecting errors.
Tip: Method's digital spend management platform can help you leverage automation for PO accuracy and implement best practices, such as the three-way-match process that highlights discrepancies and ensure invoice accuracy, before you issue payment.
Purchase order accuracy is crucial for two main reasons:
Tip: If you've implemented a digital spend management platform like Method that automates the purchase request, approval, and order process, your chances of errors drastically reduce. Method allows you to customize your purchase orders to ensure ultimate accuracy. For example, you can upload your personalized company standard terms and conditions and manage supplier-specific details such as payment terms.
Formularies or supply catalogs allow you to streamline your purchasing and inventory management, minimizing the number of different products your practice buys. This allows you to purchase more effectively and lower both your operating and supply costs.
For DSOs looking to leverage the consolidated purchasing power of all their locations to drive down costs, formulary compliance is of the utmost importance. If employees are complying with the formulary, this indicates you have control over your spending. You can then negotiate confidently, knowing you are able to direct future purchases to the supplier awarded the business.
After all, if suppliers are going to offer you attractive, below-market pricing, you need to make sure they see the volumes you committed to
If your employees are purchasing off formulary and you've already negotiated a deal, you may be losing out and paying more than you need to. Purchasing off formulary reduces your ability to maximize your purchasing power and should be nipped in the bud as soon as possible, making this a vital KPI to govern so you can stay on track and meet your savings targets.
A second formulary gives your employees a little more flexibility to ensure they can meet your supply demands or appease specific doctor requests for specific supplies while still controlling your spending and reducing the number of different SKUs your practice purchases. Although not every dental practice or DSO will require more than one formulary, if you have one, this is a great KPI to measure how often you need to order from the second formulary. If you've decided to implement a second formulary, you'll want to limit its usage to minimize the reduction of your purchasing power. You can do this by setting a guideline, such as allowing no more than 30% of your purchases to be from your secondary formulary. This would then set your KPI target, help you avoid rogue spending, and identify which offices may be having trouble adhering to policy, allowing you to gently nudge them back onto using the primary formulary.
Tip: Using our supply catalog tool Method allows you to create unlimited formularies. Users will then be given visual indicators throughout the platform on items that are on a formulary catalog.
Understanding the number of times each location has had to return products to a supplier can help you pinpoint if you have a problem, either internally or externally.
Product returns can stem from inaccurate or redundant ordering, supplier quality, or delivery issues. Although the occasional return shouldn't raise any flags, if you're seeing a high number of returns, consider adding another KPI, Vendor Rejection Rate, to help you pinpoint problematic suppliers.
Supplier returns can be costly to your business, tying up thousands of dollars in cash flow unnecessarily, consuming employee time to process the return and ensure credit is issued. Furthermore, if the supplier can't replace stock before you run out, this puts you at risk of stockouts and could hinder production and patient service levels.
If you think the issue may be internal (a quick chat with employees may help you understand the reason behind most of the returns), you may need to review your procurement process for possible improvements.
Tip: Method's digital procurement process can help you eliminate redundant orders and leverage technology to reduce human error and minimize returns.
It's no secret that procurement's main objective is to increase cost savings and improve profits. So it only makes sense you'll want to measure these two metrics. The cost reduction KPI compares historical costs to your current costs and measures the comparable savings from price negotiations or better decision-making as a percentage.
Breaking your savings down by suppliers and categories will allow you to see where you've achieved the largest cost savings, what initiatives or strategies have been successful, and where you may have additional opportunities. This will help guide your long-term cost reduction strategy.
Tip: Manual processes reliant on spreadsheets, emails, and faxes can make finding and calculating your cost savings extremely time-consuming. Fortunately, Method delivers everything you need to drive down costs and monitors your achievements for you; just check out the "savings over time" graph in our analytics dashboard.
Looking for more detail? Our deeper analytics with customizable reports can help you dig into details by item or supplier to identify where you've seen some wins and where you could be doing better.
The purchase order cycle time metric measures the purchase order life cycle, in hours or days, from the moment a purchase request is created and submitted for approval to payment of the invoice.
Decreasing your purchase order cycle times allows you to optimize your operational efficiencies and reduce overall procurement costs.
Monitoring your purchase order cycle time by the supplier can help you separate and categorize your suppliers by their ability to respond quickly to orders, categorizing them as fast, medium, and slow. This way, you'll know who you can rely on to quickly turn around urgent orders.
If you've implemented an approval process, this may be a good metric to measure your approval time and ensure approvers aren't bogging down the process and putting you at risk of running out of supplies.
Tip: Method's approval process with in-system notifications and email reminders helps your employees keep up with the approval process and minimize your purchase order cycle time.
Spend under management measures your strategically managed spend and helps minimize rogue spending. Strategically managed spend is the buying portion that aligns with your procurement strategy and abides by company rules and guidelines. In contrast, maverick or rogue spend does not follow company policy, and decisions are often made on the fly by the employee placing the order.
In order to realize cost savings, you must be able to execute plans and direct your future purchases.
Implementing procurement strategies to optimize your supply spend requires managers to enforce buying rules and guidelines that direct employees to where and what to purchase and at what price, ensuring specially negotiated pricing and terms are taken full advantage of.
But for DSOs with multiple practices, reigning in your locations and having them adopt new processes can take some time, especially if it means having to work with new suppliers or different supplies. However, consolidating your purchases to increase your buying power and leverage your total spend can result in significant savings, so it's worth your effort.
Categorized as a management or organizational KPI, this powerful performance indicator measures your strategically managed spend and has huge potential to help you realize the cost savings you worked hard to find. Allowing you to monitor your progress by location, this KPI can help you find value leakage and see where you may be allowing too much maverick spend and could be missing out on possible cost savings opportunities.
Tip: Method's flexible digital platform helps you monitor adherence to buying policies across locations, ensuring your purchasing aligns with your policies and opportunities are maximized for optimal savings.
Set strict, or not-so-strict, supplier rules, allowing employees to only buy from select suppliers, or blocking the ones you want to avoid buying from, so you can implement the strategy you see fit.
The purchasing KPIs we've highlighted are part of the essential frameworks and best practices that contribute to creating a scalable, effective dental organization that sets and meets its procurement targets.
However, you want to be leery of tracking more than is necessary. Few practices will need to track each one. Carefully selecting the KPIs that align with your main business objectives will help ensure you and your team remain focused and actively pursue success.
Method's digital spend management platform offers deep procurement analytics, helping you monitor your critical KPIs and providing the measurements you need to ensure you're on track to meet your business objectives.
Helping you identify areas for improvement and offering a scalable and flexible procurement and spend management process capable of growing with you, the Method way leads to a healthier, more efficient, and profitable practice.
Ready to take a look at the software you can leverage for a streamlined, strategic procurement process that saves you money? Contact us today for a personalized demo of our dental inventory management software.
Method Procurement Technologies gives independent dental practices and DSOs the inventory management and procurement capabilities they need to succeed. With our full, end-to-end solution, ordering dental supplies is straightforward and hassle-free.
Learn how Method Procurement's spend management solutions can improve your bottom line. Get in touch with our team today or request a demo to see it for yourself.