Procurement 101

Benchmarking and Supplier Evaluations in Strategic Sourcing

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godo godo

Benchmarking and Supplier Evaluations in Strategic Sourcing

The strategic sourcing process is a cycle, so it cannot be done once and forgotten about. A cycle approach to strategic sourcing is essential because the market conditions are constantly changing, which means that you must continually assess your sourcing procedures and supplier performance to ensure the maximum ROI (return on investment).  

In this blog, we will be covering the final phase of the strategic sourcing process: Benchmarking and Supplier Evaluation. We will discuss how to evaluate the effectiveness of your sourcing process and your suppliers in order to identify and resolve problem areas as quickly as possible.

Strategic Sourcing KPIs

Strategic Sourcing KPIs

When it comes to assessing the success of your sourcing process, tracking the right strategic sourcing KPIs is crucial. These key performance indicators provide insights into your supply chain and supplier relationships, fostering growth, profitability, and informed decision-making. Monitoring metrics such as Cycle Time for Purchase Orders, Number of Electronically Processed Purchase Orders, Average Costs for Processing Purchase Orders, Total Cost of Ownership (TCO), and Your Company’s Cost Avoidance Metrics allows you to evaluate your current sourcing strategy effectively.

Benchmarking in Procurement

In the realm of strategic sourcing, procurement benchmarking plays a pivotal role. By comparing your procurement processes and performance against industry standards and best practices, you can identify areas for improvement. A comprehensive procurement benchmarking report enables you to gauge your efficiency, accuracy, and overall effectiveness in the procurement landscape. Utilizing benchmarking insights helps organizations stay competitive and enhance their strategic sourcing endeavors.

Strategic Sourcing Metrics

Evaluating your suppliers requires a structured, data-driven approach based on measurable performance indicators. Some key strategic sourcing metrics include Production Capacity, Quality, Performance, Risk, and Environmental Impact. Assessing a supplier's abilities, previous experiences, risk management practices, and environmental impact ensures a comprehensive evaluation process that goes beyond numerical figures to encompass qualitative aspects crucial for successful sourcing.

Supplier Benchmarking

To stay ahead in the competitive landscape, organizations must engage in supplier benchmarking. This involves comparing supplier performance against industry standards and identifying areas of excellence or improvement. By implementing supplier benchmarking, organizations can foster healthy competition among suppliers, drive continuous improvement, and ensure that their procurement partners align with strategic goals.

Track the Success of Your Sourcing Process

When you monitor the right strategic sourcing KPIs, you can gain new insights into your supply chain and supplier relationships, as well as increase your company's potential for growth, profitability, and insight-driven decision-making. Using the following KPIs (Key Performance Indicators), you should be able to evaluate the effectiveness of your current sourcing strategy and identify areas that need improvement.

  1. Cycle Time for Purchase Orders - What matters is not just what you buy, but how you buy it. Your Purchase Order (PO) cycle time can be shortened to lower costs, free up your team to focus on more strategic concerns (such as building supplier relationships), and better serve your organization's production, planning, and product development objectives.
  2. The Number of Electronically Processed Purchase Orders - There is a risk of error, delay, and risk associated with every paper invoice. In an increasingly paperless world, it is crucial to keep this KPI low to ensure efficiency and accuracy.
  3. Average Costs for Processing Purchase Orders - Measures the total cost associated with the tasks necessary to process a purchase order accurately and completely. Procurement processes that are more accurate and faster will be less costly and more efficient.
  4. Total Cost of Ownership (TCO) - In the long term, what does each purchase actually cost your company? If you compare current and ongoing costs (including materials and operating costs) and performance rates to historical ones, you can determine which areas need refinement, what sourcing options need to be upgraded or replaced, etc.
  5. Your Company’s Cost Avoidance Metrics - These include soft value sources, such as process optimization, preventative maintenance, corporate social responsibility initiatives, and sustainable sourcing initiatives.
  6. Total Procurement ROI - Typically, this ratio is expressed as dollars spent per $1,000 of revenue. With a benchmark ROI of $10 for every $1 spent, you are on par with the average and will allow your company to pursue its goals while being competitive and financially strong.

Evaluate Your Suppliers

Evaluation of vendors should be a well-structured, data-driven process based on measurable performance indicators such as delivery times, production costs, and inventory levels.

Here are a few of the KPIs you can use regardless of what industry you are in:

Production Capacity - A thorough evaluation of the supplier's abilities and limitations should be performed. It is unlikely that you will rate a supplier favorably if they are unable to scale production to your production cycle.

Quality - Despite the difficulties in quantifying quality, supplier evaluations should always include this as a key component.

Performance - It is important for your company to ask as many questions as needed to determine whether a supplier is able to meet your typical demands. Previous experiences with companies similar to yours, recent projects that are relevant to the current product or process, and possible future developments are all worthwhile subjects for discussion.

Risk - Risks are inevitable for every business, but its suppliers should actively seek to minimize them throughout the supply chain. You can develop a reliable quantitative assessment of the risks posed by a specific supplier by reviewing performance metrics, such as overall delays, average response time, and corrective actions that are needed.

Environmental Impact - The sustainability of a business is crucial from both an ethical and financial perspective. Evaluations should cover waste management strategies, waste reduction practices, material procurement procedures, energy efficiency efforts, and any procedures used to handle hazardous materials.

Return to step one and restart the process

Once you have evaluated your suppliers and your sourcing process as a whole, it is time to restart the strategic sourcing process in order to fix any problems. Use e-procurement software with comprehensive automated reporting, communication, and data collection features to track the success of your current plan. In addition to tracking budgets, spending, and supplier performance, these digital solutions can provide you with information on whether the suppliers you select are adding value to your organization. If they aren’t, or if specific performance metrics and ROIs aren’t being met, look for suitable replacements the next time you conduct your strategic sourcing process.

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