SMART KPI's

Within the buyer-supplier relationship arch, it is key that performance (on both sides) is tangible. Therefore, setting key-performance indicators (KPIs) before the signature of any contract is incredibly important. Best practice would dictate that procurement professionals identify associated KPIs with any new requirements at the start of the tender process. To set effective KPIs, one method is to use the SMART acronym. This stands for specific, measurable, achievable, relevant, and time-bound. The following article will explore each element of the SMART acronym in relation to setting KPIs.

Specific

It is important that all KPIs avoid ambiguity. If either the buyer or supplier is unsure around a certain KPI, this could impact performance and lead to disputes in the agreement. KPIs and requirements that need to be achieved should be clearly defined. For example, vague goals such as “decrease late deliveries” provide no detail in what targets could be met, by which time. A more specific example of this example could be “ensure all deliveries are in full and on time, to a rate of 95% across each quarter.” Ensuring precise and specific KPIs will ensure all parties are united in a clear direction for the life of the agreement.

Measurable

A good KPI will be easily tracked across the life of the agreement and reported on in regular continuous improvement meetings. Therefore, it is important that any KPI that is set should have measurable goals alongside them. Rather than setting an open ended KPI, such as “reduce costs,” in order to track supplier performance, KPIs such include measurable elements. An example of this could be “reduce costs by 10% over the initial 12-month period of the contract.” This ensures that achievements and targets are quantifiable and can be used to track performance.

Achievable

It should be noted that while KPIs can be used to improve and maintain performance of either the buyer or supplier, any KPI should be realistic and attainable. It is true that KPIs can be used as a steppingstone to improve organisational performance, however, setting KPIs that are not easily attainable will negatively impact the buyer-supplier relationship and provide no useful data in which a contract performance can be measured. For example, setting a supplier a KPI to “achieve a 50% reduction in price,” when the market in which they supply is seeing severe macro-environmental pressures that is driving up their costs is not attainable. A more realistic approach would be to understand the cost pressures affecting a supplier and working with them to set attainable KPIs such as “ensure that the contract pricing does not rise more than 5% above cost price throughout the duration of the agreement.” This way, suppliers may be more motivated to deliver against a realistic target.

Relevant

Any KPI should be directly aligned with the overarching objectives of the procurement department and the organisation as a whole. It is important to ensure that each KPI contributes meaningfully to the success of the procurement strategy. For instance, if your organisation is focusing on sustainable practices, a relevant KPI could be "source 80% of materials from environmentally certified suppliers within the next year."

Time-Bound

Setting a timeframe for achieving KPIs helps ensure that suppliers are motivated to deliver on what is contracted promptly. Vague timelines should be avoided, and a specific timeline should be used which can be measured against at each contract reviewing meeting. For example, "reduce average delivery lead times by 20% within the next six months,” is a good example of how a timeframe can be set within KPIs to ensure delivery is met.

In Summary

Overall, the SMART acronym is a useful mechanism for designing KPIs and can significantly enhance procurement performance. Specificity, measurability, achievability, relevance, and time-bound characteristics ensure that KPIs are well-defined, quantifiable, realistic, aligned with objectives, and time-sensitive. This will help ensure that contract performance is sustained, and the buyer-supplier relationship is maintained throughout the contacted period.

If you would like further inforrmation on how we at 7 Step Solutions can help with your SMART KPIs please get in touch.