Key Performance Indicators (KPIs)

Key performance indicators or KPIs often feature in procurement contracts. They are used to monitor the performance of a supplier and are set against specific targets. KPIs can form part of a service level agreement to measure the delivery of the defined service standards.  

KPIs usually are based on quantity or quality. They have to be able to be measured.

A buyer sets KPIs that a supplier must strive to achieve to meet the terms of the contract. These KPIs will be used to judge the supplier’s performance.

KPIs should be appropriate for the level of business performance that is to be measured. For example, senior managers want a different set of KPIs to those in operations because their level of focus and time horizon is different.

Benefits of using KPIs in a contract include:

• Motivate suppliers
• Better communications
• Improved relationships
• Sharing of common goals

May organisations use a system known as SMART to help create their KPIs.
SMART stands for:

• Specific: Clearly states the purpose of the KPI and what it is intended to measure. Being explicit ensures that everyone understands the goal and how it is going to be achieved.
• Measurable: The goal must be measurable. For example, '50% market share' cannot be a goal unless you have the means to measure it. Has the product been delivered on time and in the right quantity?
• Achievable: KPIs need to be realistic. Set reasonable targets.
• Relevant: The KPI needs to be clearly linked to what needs to be achieved. If it does not then it is not a KPI.
• Timely: A time frame for the KPI keeps everyone focused on meeting the objective by an agreed date. This enables timely feedback and action.

Here are some examples of KPI in procurement:

• Delivery of orders on time in full
• Delivery of orders that meet the specification requirements
• Less than 2% of the goods rejected