Most of the key performance indicators (KPIs) for inventory management focus on what’s in your warehouse and on your shelves. These KPIs give you the necessary guidance to compete in today’s evolving markets. They help you adapt to changes in the retail landscape before they happen.
There are also KPIs that examine vendor management, but they are often neglected. These KPIs impact your ability to compete and thrive. Understanding your vendors will give you a bigger picture of your operations and more agility to adapt to any changes in the market that may occur.
Procurement KPIs
Measuring procurement KPIs helps your business optimize and regulate spending, product quality, employee time, and overall costs. These will help you develop a shortlist of vendors that you can trust. The following KPIs are essential to your procurement strategies and overall business objectives and goals.
1. Product Quality and Vendor Compliance
Customer returns are inevitable, but returns due to product defect or poor quality have a more significant impact on the customer experience. This is neglected too often, yet simple to calculate and deserves more attention. Just take the number of returns and divide that by the total number procured. A defect rate above .1% raises a warning flag to investigate why it’s happening and how to take action.
Vendor compliance focuses on contractual and policy adherence. Do your invoices and product received match the purchase order? Does the price paid match the negotiated price? Vendor compliance determines how many times you had to address inconsistencies. Calculate the times you had to question an order and divide it by the number of orders made.
2. Purchase Order Delivery
Purchase order (PO) lifecycle time measures the steps involved with purchasing and receiving an order. Delivery is only one of the steps in this process, and it’s the last one. It also has a significant effect on the cost per invoice, so increasing delivery times may save you money, but it may also cause stockouts.
The other steps deal with purchase orders and lead times. How long does it take for you to create and send a PO? This should be automated, so it should be negligible. How long does it take to process and ship? Your purchase order cycle time can be broken down even further by looking at the supplier lead time.
3. Cost Per Invoice
Competition among vendors holds costs in check and levels the playing field. Yet, the price has a lot more say in whether or not you’re going to purchase from a particular vendor. Focusing on price ignores the relationship you develop with each vendor. Therefore, the emphasis should be placed on costs per item as well as how the vendor gives you a competitive advantage. Value within a relationship can overcome a few extra points in price.
Sales Metrics for Vendor KPIs
Some of your sales and inventory metrics can help refine your analysis of each procurement KPI:
- Sell-Through Rate – Generally calculated every month, this metric indicates how much inventory was sold versus what was received. You can adjust your purchase orders according to the sell-through rate, as well as negotiate with vendors on price and quantity.
- Inventory Turnover – Turnover rates are great to follow when looking at total inventory or a specific category. They give a better overall picture and indicate opportunities to reduce carrying costs.
- Shrinkage – Errors during receiving and theft are two major contributors to inventory shrink. A high rate of shrink requires action to stem your losses.
A Successful Supply Chain
Using vendor management KPIs to evaluate supplier reliability, performance, and compliance can help you quickly refine your supply chain. It allows you to minimize disruption, waste, and costly errors that take away from order cycle times and profits. Your company’s success relies upon a healthy, efficient, and reliable supply chain. This is essential in meeting your own customer’s needs.