Purchasing is an integral part of any organization. It’s the process of buying products, services, and solutions from suppliers. A well-run purchasing department can help reduce costs, increase productivity, and improve customer satisfaction. To achieve these objectives, it’s important for organizations to have a system in place that allows them to measure purchasing performance.
Supplier Rationing
Supplier rationing is a measure of how many suppliers the purchasing department is using. It’s a good measure because it’s easy to calculate and can give you an idea of how well your purchasing department is performing.
Cost as a Percentage of Sales
Cost As a percentage of Sales (CAS) is the most common measure of purchasing performance. It’s the ratio between total cost and sales, expressed as a percentage.
To calculate CAS, you need to know your costs, which include the value of goods purchased and freight charges related to those purchases (the latter can be found in your accounting system). You also need to know your sales for the period being measured. If you have multiple business units and/or locations involved with purchasing, it’s best to determine this data separately for each location and then combine them into one result at the end.
Once you’ve gathered all that information from your accounting system or other sources (if necessary), here’s how to calculate CAS:
Add up all costs incurred during any given time period—be it quarterly or annually—and divide by total net sales for that same time period.
Supplier Turnover
Supplier turnover is calculated by dividing the number of times that a supplier is replaced during a given time period by the total number of suppliers used during that same time frame. The advantage of measuring supplier turnover is that it can help you identify which suppliers are underperforming, and therefore in need of improvement. This metric can also help to identify areas where purchasing processes need attention, such as inadequate communication or lack of training for buyers who may not be using best practices when dealing with suppliers.
The disadvantage of measuring supplier turnover is that it does not account for factors such as price increases or other financial factors outside your control (such as availability). If you’re interested in accounting for these types of issues when measuring performance, consider using another metric like average unit cost per order rather than just overall costs associated with each product category/specific vendor/etcetera
Cost Per Unit
Cost per unit is a simple measure of purchasing performance, as it uses the same formula to calculate the cost as you would if you were using a spreadsheet. The formula for cost per unit is:
- Cost = Quantity/(Qty/Unit) * Unit Price
Here’s an example: Let’s say that you purchased 100 units of something at $3 each. Your total cost would be 100*$3=$300. Divide this by your quantity (100), and you have your answer—a cost per unit of $0.30
To compare performance from year-to-year, simply divide last year’s total purchases by the number purchased this year. This will give you an idea of whether or not purchasing increased or decreased compared to previous years
Economic Impact Analysis
Economic Impact is a measure of the positive economic uplift your organization’s purchases have had for specific categories and regions of suppliers and employees. When your organization makes a purchase with a supplier or makes a specific hiring decision, there is a positive economic impact that reverberates through the supply chain and the communities that are touched by that individual employee or that supplier. A complete Economic Impact Analysis Report provides a comprehensive picture of how your company’s purchasing is providing improved economic standing through their spend. This report can help identify how sourcing and employment decisions are reflecting the mission, goals, and values of your organization.
These are Good Ways to Measure Purchasing Performance
You can measure purchasing performance by looking at the following factors:
- Goals: The first thing you might want to do when measuring purchasing performance is making sure that your measurements align with your company’s goals. If they don’t, it could be time to reevaluate those goals so that they do fit with the needs of your organization.
- Needs: Another way to figure out what kind of measurements are best for your company is by thinking about its needs and capabilities—both internal and external—and determining whether or not they match up with what you need in order to succeed as a business in general (and within particular areas).
- Capabilities/culture: You should also think about how well-equipped your team members are at handling various aspects of their job responsibilities, including purchasing tasks like negotiating prices on new equipment or setting up budgets for future purchases based on projected costs versus actual spending habits during previous periods such as last quarter’s fourth quarter (October through December) sales period versus February through April’s first quarter earnings reporting period).
Conclusion
In conclusion, we can say that purchasing performance is a complex topic. It’s essential to understand your organization’s goals and the supplier relationship before you start monitoring purchasing performance. There are many different ways to measure this, each with its own pros and cons. With some careful consideration and research, however, you should be able to find the method that works best for your company.
Gainfront provides dashboards and reports that help track all of these purchasing performance metrics. For more information please visit our eProcurement Solutions page.
Rahul Asthana has a PhD in Operations Management from the Anderson School at UCLA. He has 25 years of experience in supply chain management, starting his career in IBM working in supply chain operations. He then moved into product management and product marketing of supply chain software while at SAP and Oracle. He manages product strategy and product management at Gainfront. In terms of hobbies outside of work, he really enjoys tennis. Follow Rahul Asthana on Linkedin!
