I have had the pleasure of discussing the benefits and experiences of electronic procurement with many customers. This discussion often gets around to what the main KPIs should be on the procurement dashboard. Although there are numbers of KPIs that offer various insights I am still drawn to the power and simplicity of the approach of a CEO I met in the UK a few years ago. The company was a national hospitality business. He had one procurement KPI that was printed in huge font on an A4 page and stuck up on the pillar outside his office every day. (Everyone knew what he thought was important.)
The KPI was the percentage first match of an invoice to the order. How powerful. It summarised all the steps that needed to be achieved throughout the organisation. They started out with a target of 88%. I’m not sure of the logic for 88% but a good target nevertheless. Over time they reached and started to consistently beat that target using iPOS .
This KPI indicates the ongoing application of good procurement practice. To have this set at 85 – 90% means the system is operating very smoothly. The organisation’s mindset in order to achieve this goal is one of continuous improvement.
When the organisation is achieving 90% first match, this translates into the following system goals being achieved:
- The purchase orders are not created after the fact.
- Spend has not circumvented the organisations’ approval regime.
- Physical recognition of the goods has been acknowledged. Sometimes organisations find this ‘inconvenient’. I do not get this inconvenience when you are spending the company’s money.
- The price and quantities as ordered are received and invoiced, subject to agreed tolerances.
- The organisation probably has an effective policy of electronic trading with suppliers.
- The organisation has effective procedures in place to limit the spread and number of suppliers and the growth of internal catalogues.
- The processing of the purchase transaction of goods and services is being done at a low cost. There is no ineffective administration resource re-doing work.
- Spend control is in place as requisitions are allocated to cost centres, budget checked and prior approval before the actual expenditure.
Why do I remember this so clearly? I remember the CEO having a heated discussion with his opposite number at a major brewer as the supplier’s billing system was truncating the PO number and thus not achieving first match. The interesting point the CEO made was that this supplier cost him say £10 to process an invoice as opposed to other suppliers whose invoices would cost a fraction of a penny as they passed all electronic business rules automatically. Hundreds if not thousands of invoices were involved and it was costing the company dearly to do business ineffectively. This issue was so important that the call was CEO to CEO.
Often when we discuss motivations for electronic procurement the talk centres on empowering the organisation to negotiate for better prices. The reality in my experience is different, as most companies have already negotiated prices that are not fattened. However we have seen suppliers who will offer discounts as an incentive for an organisation to do business electronically.
Punch out and electronic invoices are the foundation stones for low procurement administration costs and the key measure of your ongoing success is percentage first match. The question that needs to be asked is: “What do I have to do to only pay a fraction of a cent to process horrid paperwork.”
If as Procurement Manager you had the opportunity to headline one daily KPI to the CEO what would that KPI be?
You can read more about Professional Advantage and iPOS here.
Kimberly Land Council used iPOS to improve a key KPI by 50%. Read the case study.
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