The Top CPO Metrics Used to Measure Inflation, Risk, and Uncertainty
In recent years, the overall state of Procurement has been bolstered by increased proficiency, expanding engagement, and a growing direct impact on operations. However, the path to success is never easy. With inflation rising, CFOs must tighten their belts. And they’re not the only ones—other department heads are also increasingly budget-conscious, creating a new opportunity to partner with procurement for better budget management.
For the first time in more than a decade, more CPOs are prioritizing savings. In fact, 44% of respondents noted supply risk as a top priority, while 27% cited ESG as a priority–and the percentage of CPOs that have prioritized savings has nearly doubled year over year since 2021. The increase is directly correlated to the turbulent market caused by the pandemic, supply chain disruptions, and rapid inflation.
When it comes to supply continuity, being proactive about mitigating disruptions is essential, yet many procurement organizations may still lack sufficient resources. A supply chain event can have a massive impact on operations and production quality and leave customers in the lurch, impacting customer satisfaction, revenue, and profits. For example, consider the challenges in the automotive industry that stem from the supply chain issue in chip manufacturing. Massive delays have led to serious, financial, operational and performance impact across a wide range of companies.
Aside from mitigating risk and saving organizations money, Procurement teams have an opportunity to add value by working closely with suppliers to reduce carbon emissions while ensuring supply chain continuity through diversity and proper forecasting. Achieving these goals requires maintaining complete visibility across your suppliers (into tier 2 and 3), and setting up processes for effective and efficient collaboration and transparency across the supply chain.
Tracking the Metrics that Matter
While Ardent expects Procurement to rise to and tackle these challenges, tracking the metrics that matter will help them stay focused for full recovery. During a recent Ivalua webinar, Andrew Bartolini, Founder and Chief Research Officer at Ardent Partners, shared research and insights about the state of procurement in 2022 and key metrics that matter. Here are 10 key performance and operation metrics, organized into three categories, that Ardent recommends every CPO can use to evaluate and improve their processes and performance:
- Savings: While savings is not the best measure of Procurement’s overall value, this year, it will be a critical metric for finance and the executive team. Last year’s actual average savings was down 18% to just 6%, and in 2022, it stands at about 6.1%. The decrease in savings is a clear indication of the impact of inflation.
- Savings Leakage: This new metric tracks the gap between identified and realized savings, and results from things like poor contract management and flawed supplier onboarding. The average enterprises loses about 7.1% of cost savings this way, but they can reduce leakage by about 40% with better connected sourcing, contracting and procure-to-pay processes.
- Savings from Sourcing: In 2021, competitive sourcing projects generated an average of 7.7% in savings. Tracking this metric and taking steps to improve it can help combat inflation.
- Addressable spend: Addressable spend is spend that can be impacted through sourcing activities. Surprisingly, competitive sourcing has decreased in 2022, down from 48% to 44%, mainly because of rising prices that put suppliers in the driving seat. This metric can be improved using eSourcing and other technology that simplifies the process of comparing supplier pricing.
- High-Risk Supplier Rate: During the pandemic, risk was at an all-time high–testing the supply chain and underscoring the importance of tracking high-risk suppliers. Ardent found that many didn’t even know how many suppliers are high risk. Dealing with risky suppliers is not inherently bad and there are many reasons why you might engage with suppliers that have a higher risk profile. The key is visibility – if you’re taking on known risks, you can manage them, but it’s the unknowns or blind spots that cause serious problems.
- Risk Visibility: In order to know your high-risk supplier rate, you have to track risk visibility. This should include tier-two and tier-three suppliers to your tier-one suppliers. Any risk that impacts your tier-one suppliers will eventually impact your company, so having visibility into that level of risk is critical. If you can map the relationships between suppliers, you’ll be able to detect and mitigate potentially disruptive activities before they impact your business.
- Spend Under Management: In 2022, the average spend under management is 67.4%, a 7% increase since 2021. This metric is important to track, because for every dollar placed under procurement’s control, enterprises realize between 6-12% savings. Other benefits include improved quality and lower risk. According to Ardent, about 5% of CPOs rank spend under management as one of the top three metrics to track.
- Spend that’s Contract Compliant: For every non-compliant dollar of spend (i.e. maverick spend), enterprises pay an extra 12-18%. That’s why this metric is the second-most tracked among CPOs. Unfortunately, today, only 61% of spend is contract-compliant.
- Enabled Suppliers: This is a critical area of growth for organizations. About 43% of an enterprise’s supplier base is enabled with technology to complete various transactions, up from 38% last year. This metric will grow as organizations digitally transform procurement with platforms that support and streamline process workflows and knowledge-sharing.
- Diversity Spend: Another new metric, diversity spend, is becoming more critical, as CPOs realize the value of increasing spend with diverse suppliers to mitigate potential business disruption. According to Ardent, in 2021, diverse enterprise spend hit an average of 8.2%, and in 2022, increased to nearly 10%.
Delivering Better Visibility Across Suppliers
Unfortunately, many procurement teams lack the transparency and visibility across the supplier base to effectively track the metrics that matter, to assess and mitigate risk. Data quality and access issues get in the way, preventing a 360-degree view, and manual, inefficient collaboration makes it difficult to share important information to drive improvements. Visibility is essential to quickly and effectively respond to a supply chain event, and to collaborate with suppliers on innovative risk mitigation strategies.
Ivalua’s flexible no-code/low-code platform was designed to create organizational agility through digital transformation, helping organizations keep pace with change and growing business demands. Key capabilities we provide include:
- Transparency into the Full Supply Chain: Ivalua provides control over enterprise-wide supplier data through embedded vendor MDM capabilities, as well as 360-degree supplier visibility. A unified data model consolidates all of the relevant information about a supplier into a single data record. Ivalua’s robust ecosystem of third-party information sources is seamlessly integrated to provide data from Tealbook for diversity, Ecovadis for ESG, D&B for financials, and RiskMethods for risk notifications. Sub-tier transparency offers insight into the full supply chain, with the ability to pull risk and other information on sub-tier suppliers, automatically. Users can quickly see common dependencies across suppliers for a given category, enabling faster and informed decision-making.
- Collaboration: Ivalua makes it easier to collaborate efficiently and effectively with internal stakeholders and suppliers, to improve performance, mitigate risk, and drive innovation. The platform supports collaboration from source-to-pay, enabling users to securely share information, enhance project management and automate improvement and action plans. The platform offers advanced capabilities to enable efficient collaboration in strategic areas of direct spend, such as BOM planning, forecasts and planned orders, along with integrated chat to eliminate the need for external communication systems.
- Reduced Leakage: Our unified suite and high adoption ensures far below-average leakage rates with purchases that are compliant with contracts.
Ultimately, procurement metrics create an invaluable understanding of your supply chain so you can correct the imbalances that contribute to inflation and risk. You can watch the full webinar with Ardent Partners here.
Ready to digitize your supplier and product lifecycle, improve collaboration, and launch more products faster, with higher margins? Contact Ivalua today.