The 6 Top Procurement Performance Metrics for Driving Cost Savings & Efficiency

Being in procurement these days can feel like you’re Sisyphus heaving a huge rock up a mountain but never able to reach the summit. You push and strain to reduce your company’s costs, but outdated tools and shrinking budgets always keep you from achieving your goals.

If you want to get that rock all the way to the top, you need to know what you’re currently doing that’s working and that’s not. Better understanding your procurement performance can help you identify cost saving opportunities, streamline your operations and — after you make changes— quantify your successes.

Let’s take a look at 6 procurement KPIs that spotlight areas of inefficiency so you can strategically target your improvement efforts.

6 procurement KPIs that matter

Cost savings

Cost savings is THE essential metric for proving procurement’s bottom-line impact. The standard formula for cost savings is: Initial proposed cost - actual cost = cost savings.

For example, if you’ve traditionally paid $10,000 a year for a product, but negotiated the price down to $7,000 annually, you saved your company $3,000.

You can also calculate cost savings as a percentage: Cost savings / initial proposed cost = cost savings percentage.

Continuing the example from above, your $3,000 cost savings divided by the $10,000/year original cost gives you a cost savings percentage of 30%.

Cost savings can also be measured in other ways depending on the specific needs or preferences of your organization, such as: 

• Compare the current year’s spend with the previous year’s.
• Compare the price you pay with the average market price for similar goods or services.

What’s considered a best-in-class savings rate? 

World-class companies achieve a savings rate of just over 6%. Additionally, organizations with top-tier procurement practices deliver nearly double the cost savings of median performers, while spending 21% less on procurement overall.

Spend under management (SUM)

Spend under management is a critical indicator of how much of your spend follows proper procurement procedures.

Anything purchased outside of the procurement process is known as maverick spend. To find your SUM number, subtract your maverick spend amount from your total procurement spend: Total organizational spend – maverick spend = SUM.

Say your company spent $50 million last year. Of that, $10 million was maverick spend — so your SUM is $40 million.

If you’re not sure what your maverick spend is, there’s another way you can find out what your SUM is: Total spend managed by procurement / total organizational spend = percent SUM.

If your company spent $50 million and procurement managed $40 million of that spend, your SUM percentage is 80%. Hint: You can determine the total spend via procurement by adding up all the invoices that match with an approved PO.

What’s considered a best-in-class SUM percentage? 

Every new dollar of spend placed under procurement’s control can result in 6-12% savings according to Ardent Partners, so the higher your SUM, the better. The average organization has 57.1% SUM. But best-in-class organizations achieve an impressive 91.5% SUM by competitively sourcing 23% more of their addressable spend, having 42% more of their suppliers set up for digital invoicing, payments and communication, and adopting key technologies at a much higher rate than their peers.

Spend under contract (SUC)

Spend under contract measures the portion of spend flowing through pre-negotiated supplier contracts and where potential savings may be slipping through the cracks.

Start by adding up the total amount spent on goods or services that fall under the scope of a supplier contract. Then, divide that number by the company’s total spend: Total SUC / total company spend = percent SUC.

What’s considered a best-in-class SUC percentage? 

Not surprisingly, the ultimate goal for this KPI is 100% SUC. The more goods and services you buy under contract, the more money you save and the better your cashflow is. According to the Procurement Metrics That Matter in 2024 report from Ardent Partners, world-class Procurement teams boast a rate of 74.9% spend that’s contract compliant, compared to the average rate of 59.5%. That means top teams are 26% better at connecting their sourcing and procurement processes and ensuring users are purchasing through negotiated contracts.

Addressable spend that’s sourced

This metric reflects Procurement’s ability to influence key categories and extract maximum value from sourcing efforts.

“Addressable spend” is the portion of a company’s total spending the Procurement team can potentially influence or control through competitive sourcing and contract negotiations. To calculate this KPI, divide the total amount of spend currently managed by Procurement (a.k.a. sourced spend) by total addressable spend: Sourced spend / addressable spend = percent of addressable spend that’s sourced.

For example, if a company’s sourced spend is $500,000 and its addressable spend is $700,000, the rate of addressable spend that’s sourced is 71.4%. 

What’s considered a best-in-class addressable spend percentage? 

According to Ardent Partners’ Procurement Metrics That Matter in 2024, the average Procurement team sources 44% of their addressable spend. World-class companies, however, source 60%. As inflation creeps ever higher, having more of your spend going through competitively-priced contracts translates to a very impactful level of savings.

Want to learn how to better benchmark your performance and get practical strategies to improve? Interested in what an AI-driven automation platform can do for you (and your KPIs)? Download our free ebook:

Requisition-to-order cycle time

A fast, efficient internal workflow reduces costly delays and strengthens supply chain agility, so a shorter requisition-to-order cycle time is better.

Take the difference between the date a purchase requisition is submitted and the date the corresponding PO is generated. Then divide that time difference by the number of requisitions processed during that same time period to get your average cycle time per requisition. 

(Date PO generated – date requisition submitted) / number of requisitions processed = requisition-to-order cycle time

Pro tip: Make sure you use the same time unit (days, hours, etc.) consistently throughout the calculation.

What’s considered best-in-class cycle time? 

A faster cycle time is always better. With supply chain uncertainties becoming the norm, shorter cycle times reduce costly delays in getting business-critical products and services. A faster, more efficient cycle time also frees up your team to focus on higher-value work such as building stronger supplier relationships that can result in more competitive pricing and contract terms for your company.

The American Productivity & Quality Center found that top performers have a requisition-to-order cycle time of 5 hours. By comparison, businesses with poor procurement practices take about 48 hours. That’s more than eight times longer!

Cost to process a purchase order

This revealing metric uncovers how manual (or automated) your processes truly are. However, it can be a bit tricky for a couple of reasons. First, it involves tracking a larger number of metrics than most other procurement KPIs. Second, there’s no one-size-fits-all list of variables that determine the cost of processing a PO. Some companies may consider direct and indirect costs when calculating this KPI, while others may only use direct costs and the time each order takes. In general, however, this KPI includes the total time spent and the number of staff members directly or indirectly involved in each step of PO processing.

The cost to process formula is: Total cost of processing all POs in a period / number of POs processed in that period = avg. cost to process a PO.

Pro tip: Keep these factors in mind when making your calculations: 

• Labor costs: salaries of employees involved any stage of the PO process
• System costs: costs of using procurement software, including licensing and maintenance
• Paper costs: printing expenses
• Communication costs: costs associated with any necessary phone calls, emails, etc. during the process

What’s considered a best-in-class PO processing cost? 

Obviously the goal with this KPI is to keep it as low as possible. But because the specific input costs of this KPI can vary from business to business and industry to industry, there’s no hard and fast number that’s considered the “perfect” PO processing cost. The Center for Advanced Procurement Strategy places the average cost to process a PO at $527, but that number might not be realistic for your industry. Your best bet is to compare your cost to those of businesses similar to yours in terms of industry, revenue, number of employees, etc.

If your performance in these 6 areas could be better — or you’re not even sure what your current performance is — AI-driven automation gives you the visibility and tools to move the needle. 

Why procurement automation is the performance multiplier

If your current procurement efforts aren’t getting you where you want to go, AI-driven automation may be able to help. From eliminating time-sucking manual tasks and reducing the inaccuracies that go along with them, to speeding up approvals and increasing transparency, procurement automation lets your team to spend more time on high-value strategic tasks, make data-driven decisions and reduce operating costs.

AI-driven automation supports stronger procurement results by:

• Improving the supplier onboarding process so they’re set up for seamless transactions
• Creating a frictionless purchasing experience for employees that discourages maverick spend
• Providing full visibility into procurement performance, including detailed analytics
• Supporting category management that groups similar goods and services together to optimize purchasing decisions
• Using hosted catalogs for goods and services with the greatest order volumes where users can easily create new requisitions
• Automatically creating POs for new requisitions
• Minimizing the number of approvers, automating the approval workflow and providing greater visibility into which approvers may be holding up the process
• Eliminating manual data entry by automatically populating the correct fields with the correct information
• Automatically routing POs to the right approvers and keeping POs moving through the workflow
• Sending POs directly to suppliers electronically

But this is far from an exhaustive list of all the ways automation can empower the procurement process.

Looking to get started with procurement automation? Get a hands-on demo of Esker's procurement software.