The procurement performance should be measured, because the procurement section plays an important role in the supply chain in light of the economic contraction.
Reducing the cost of raw materials and services can allow companies to compete with the price of their finished goods in order to win business, and the clear measure to success at any purchase section is the amount of money the company can save.
However, there are a number of performance measurements that companies can use, such as:
1- Procurement efficiency
2- Procurement effectiveness
3- Procurement function
– Performance measurements
Administrative costs are the basis to measure procurement efficiency.
The department is connected to the activities that the procurement section might do in comparison with the budget applied by the department.
If costs are within the budget, then the efficiency of the procurement section will exceed expectations. But, if it uses over-budgeted funds, the purchasing function will not be effective.
2- Procurement Effectiveness
The price that the procurement section pays for an item is not necessarily a good measure of performance.
The price of the commodity may fluctuate due to market conditions and other demand pressures, so the procurement section may not be able to control the price. The common way to evaluate the effectiveness is to review inventory turnover. This means the average number of times that goods are used or shifted during this period.
However, the seasonal requirements for items in the inventory can make this measurement inaccurate, so it is not always a useful way.
3- Procurement Function:
The performance can be measured against the functional requirements of the purchase function.
The function of the procurement section is to provide the right item on time at the lowest cost. Performance measurement can take into account these elements, but not the factors related to supplier stability, material quality issues and supplier reductions.
4- Performance Measurements
The performance of procurement function can be measured via many measurements.
The company can decide which of these measures is related to the performance:
– Cost Savings: If the section buys a commodity at a lower price than before, then it saves the cost. This can happen when a new supplier is found, uses a lower-cost alternative item, a new contract is signed with the seller, a cheaper transfer method is found, or the procurement section negotiates a lower price with the current supplier.
– Increase Quality: When an item improves quality either by using a different supplier or by negotiating with the current one, the improvement will be reflected in reducing waste or production resources.
– Procurement Improvements: Efficiency used in the procurement section will increase effectiveness. This could include the introduction of electronic data interchange system (EDI), electronic procurement systems, inventory of vendors, and payment of receipts.
– Transport Improvements: When the Procurement Department negotiates with an airline or a number of telecommunications companies to reduce the cost of transporting goods from the seller to the production facilities, the cost of an item will be reduced, and this cost saving can be used as a measure of effectiveness.
– Procurement Performance: Many studies said that there is no single method covering each procurement section. However, there are a number of key measures that are useful such as cost savings, supplier quality, delivery standards, price efficiency and inventory flow.
Although these basic measures are common, they differ between industries and companies and their importance will change over time. Therefore, they must be evaluated and adjusted on a regular basis.
If you are planning to attend a Procurement course please contact (LPC) Training.