Measuring Your Procurement ROI
When it comes to a supply chain, the procurement process for suppliers can either lead to major returns or losses depending not only on the procurement strategies you use and how long they take but also on the suppliers that are procured and their overall effectiveness. Think of this in a similar way to how employee retention is cheaper than turnover or how a great employee can earn your company double what a good one can. Having said this, the key to a good procurement ROI is all about the ways in which you find suppliers and ensure they are the best for your brand consistently.
But, how can you truly measure these methods, determine if your ROI is adequate, and reinvent your procurement strategies with these metrics in mind? For this, we at Stimulus have compiled the data below in order to truly help business owners and leaders find procurement success in the new year and beyond.
The Value of a Strong Procurement System
Return on Investment, or ROI, is one of the most important metrics a company can analyze to determine its success. When it comes to procurement ROI, the goal is not just to determine if the procurement process is effective but also determine if your current suppliers are increasing your ROI every quarter respectively. This is why ROI is so highly valuable to leaders and owners as well as their data and finance departments.
A strong procurement system helps in multiple ways to lead to a healthy ROI. Some of the most obvious ways include a streamlined strategy for finding suppliers, an easier way to compare suppliers to find the best ones, quicker product shipping for customers, higher quality product selection, and less unnecessary work on your team’s end. However, there are other less recognized benefits that should also be considered:
- Reduced supply chain costs
- Competitive edge on your market
- Shipping and packaging efficiency
- Less overhead
- Better brand image
- More interest from potential customers and employees
- Higher likelihood of positive online reviews
- Past client recommendations leading to new sales
- The ability for product innovation
- Mitigation of supplier risk
- Less supply chain disruptions
- Better supplier communications
- Lower risk of price volatility
- The ability to outsource shipping tasks to trusted suppliers
- Easier data and finance management
- Overall supply chain resiliency
Understanding these benefits is the first step to developing ays to measure your procurement strategy’s effectiveness and the ROI it has. However, the next step is identifying the best ways to measure this ROI and ultimately redefine your supplier relationships if necessary to increase these metrics moving forward.
How to Measure Your Procurement ROI Effectively
There are multiple metrics that can be utilized to measure roi when it comes to supplier procurement. Some of the most important ones are as follows:
- Procurement process efficiency
This metric relates to the overall procurement process and whether or not your team and most trusted suppliers find it to be efficient. Although this is more based on conjecture, simply turning to your team and best suppliers to ask them how this process can be fixed or if it is adequate as-is can help to increase your ROI immensely in the long run.
2. Cycle length
When you place a purchase order, how long does it take for you to actually be paid? If the answer is longer than you would like, it may be time to analyze this aspect of your process to find ways to remove inefficiencies.
One way to do this is to automate the cycle time. Organizations that have automated [purchase cycles] have a faster cycle time to place a purchase order (24 hours at the median) compared to those that use a manual/spreadsheet system (35 hours at the median).
3. Catalog compliance percentage
The next metrics that should be measured is the time it takes for team members to find adequate suppliers. This process can take up multiple employees’ entire weeks if not tracked and mitigated swiftly. However, without supplier data and a strong network to choose from, this process can cost companies greatly every year.
Fortunately, the Stimulus Relationship Intelligence Platform (SRIP) helps to make supplier procurement truly a breeze and to identify exactly what suppliers are best for your company using AI and data-driven analysis. This can drastically reduce your employee procurement overhead and help lead to the returns you are really looking for.
4. Supplier quality and consistency
Although this may seem like a subjective metric, the quality and consistency of your suppliers that have been procured can easily be measured by their product quality, their timeliness, their communication skills, prices, and their purchase cycles. If your suppliers are not meeting your needs and the needs of your customers, it is time to find new suppliers that have long-lasting returns justifying your procurement process.
5. Customer sentiment
Lastly, when analyzing your supplier relationships, you will also want to analyze the opinions and reviews of your customers. Are they complaining about shipping times, prices, or product quality? Do they want to be a repeat customer or are they vowing to never buy from your brand again? These questions will help you determine if the suppliers you procured are actually worth their price and worth keeping a relationship with. After all, as Bill Gates once said, “Your most unhappy customers are your greatest source of learning.”
With a better grasp on the value of procurement ROI tracking and how to measure these data points effectively, all that’s left is to start analyzing your current structure and making changes that benefit your brand significantly for many years to come. To learn more about ways to streamline your procurement process, take a look at this highly informative podcast we released last year, Supply + Demand: Digitizing Procurement to Develop a World-Class Supplier Experience.