Every department contributes to the company’s goals. However, the procurement department, and in particular the procure-to-pay processing, is the most important. This is also known as the P2P process–is a powerful source of cost savings and value. But in order to achieve maxim To maximize your return on investment (ROI), it is important to monitor certain key performance indicators or KPIs.
It can seem overwhelming to choose which procurement KPIs are going to help your procurement department improve its procure-to-pay cycle. However, businesses of all sizes and industries can benefit from starting to search for the best procurement ROI. Here are some key procure-to-pay KPIs that will give them the most information about the process.
The Value of Measuring Procure-to-Pay KPIs
It is the core of procurement. It includes everything from procuring raw materials for production to obtaining goods and services like utilities, office supplies, and custodial services. The procure-to-pay cycle has been a key target for optimization and continuous improvement.
You can make better decisions and achieve greater cost savings by gaining insight into your procurement processes’ efficiency and efficacy. Without tracking key metrics, however, you are compromising valuable intelligence and missing opportunities to reduce total costs of ownership (TCO), improve procurement ROI, or lose money due to suboptimal workflows.
You can track procure-to pay KPIs to achieve cost savings and efficiency improvement in procurement and accounts payable. This will allow you to: reduce your purchase order cycle; eliminate or reduce maverick spending; provide real-time data insights that improve forecasting and reporting; speed up invoice processing times; and increase cash flow and cash flow. These benefits result in greater efficiency throughout the procurement process, which, in turn, directly contributes to a healthier bottom line.
12 Essential Procure-to-Pay KPIs
Although every business is unique, the basic performance metrics that are used to improve the p2p process can be applied to all procurement functions. Tracking procure-to pay KPIs can be made easier and more accurate by using an automated cloud-based procurement system with artificial intelligence, built-in support of analytics, and central data management. An automated procure to pay software solution makes it easier and more accurate to track and improve performance. It also reduces risk exposure and miscommunication by providing complete transparency for all your transactional datastreams.
1. Purchase Order Cycle Time
Purchase orders can be processed quickly and efficiently orders can be placed and paid much faster.This KPI is the core of P2P. It’s important to understand how long it takes for your team to issue, review and approve purchase orders, process them, and then move the process along.
2. Average Cost to Process a Purchase Order
Although the average cost to process a PO may vary greatly, it is the cumulative and associated costs of each purchase and the time they require that can make this KPI sink.
An itemized track of the time it takes to process a purchase order, the number of staff hours needed at each stage and any expenses, such as special supplier fees, can give you a better picture of your procurement function’s PO processing efficiency than just the cost of the transaction.
3. Lead Time
It is imperative to keep track of administrative time (i.e. time required to request, approve and process an order) as well as production time (i.e. time needed for filling the order). This metric is different from PO Cycle Time because it ends when goods arrive and not when payment is made.
4. Electronic PO Processing Rate
Automation makes POs more precise, quicker, and less likely to generate costly exceptions because of human error. Higher KPIs means lower costs and the more valuable tasks your team is able to complete, the more time they will need to spend.
5. Invoice Processing Time
What is the value that your AP department is losing due to late fees, missed discounts, and bad supplier relationships? This KPI will be lower if your invoice information is accurate. Also, your workflows will be more efficient and your approvals and reviews can happen faster.
6. Average Cost to Process An Invoice (By Type)
To reduce these costs, it is important to know all the costs associated with processing invoices received by your company (including late fees, indirect expenses, labor costs, data entry, exceptions, and corrections) is essential to reducing those same costs. This KPI should be kept as low as possible to save money and protect your cash flow. It will give you an accurate picture of your total process costs so you are not spending money you don’t have.
7. Invoice Exception Rate
Automation is also a great way to automate this KPI. Automated, intelligent workflows that handle invoice creation, approval, verification, and approval will improve accuracy and efficiency. Exceptions can be effectively written out of this process. This KPI will reduce overhead and allow your team to focus their efforts on more profitable and important matters.
8. Average Invoice Approval Time
Each time an invoice is placed in the approval process, it creates costs for your company. This KPI should be kept low to save costs and allow for greater efficiency, and additional savings via early-payment discounts or avoiding late fees.
9. Days Paid Outstanding (DPO)
It takes on average a month to pay off its outstanding accounts. This KPI can be used to gauge how efficient and effective your accounts payable function operates. You may need to balance high DPO and low DPO depending on your financial situation. This can indicate strong credit terms, but also difficulty paying creditors. Low DPO can signify poor credit terms, or failure to fully leverage vendor credit.
10. Spend Under Management (SUM)
Spend under management refers to the percentage of procurement spending that is controlled by management. This is a critical metric that you should keep high if you want to maximize your budget and improve your financial forecasting. You can calculate it and track it using the following formula Total approved spending – maverick expenditure = SUM
11. Realized Savings
This KPI combines two KPIs on contract spend and overall spending compliance. They focus on the total savings and value that the company can achieve through the optimization of the P2P processes. On-contract spend is the spend that conforms to vendor contracts. Overall spend compliance measures the effectiveness of employees in implementing internal controls to spend. Automation and artificial intelligence are strong contributors to both of these KPIs. A procurement solution creates an “open garden” for purchasing that records all transactional data and allows for analysis and review.
12. First-Time Match Rate
This KPI measures the accuracy and completeness (purchase orders, receipt paperwork, invoices) of documents and how successful your accounts payable team matches them on the first attempt. This KPI could have a negative impact on the AP department’s value, particularly if it is low due to manual processing and any errors that are inherent in it. This KPI can be automated to increase its value by using automated three-way matching.
If sales and production are your heart, the P2P process will be the lungs that bring in the oxygen needed to keep the show going. You can track the correct procure-to-pay KPIs to ensure that your processes are efficient, accurate, effective, and stress-free. This will allow you to focus on growth, innovation, value, and value for your business.