Question

1. Why should we measure purchasing performance?

2. What are the key purchasing measures?

Answer 1

Ans. 1. With globalization, the competition between business organizations at regional as well as global stage has increased manifold. Companies work on their supply chains and measure purchasing performance to attain competitive advantage and to succeed sustainably. Purchasing is no longer merely a supporting or administrative function, but it is a strategic element that has a profound impact on the overall performance of any business organization. A simple approach to understanding the concept and area of measurement of purchasing performance is to look at it at a kind of measure to save costs incurred towards purchasing and running the allied purchasing/logistics processes. But the measurement also yields other benefits.

When a company tries to undertake to purchase in line with the budget, it turns to be more efficient. Effectiveness is achieved when the company overcomes shortcomings in the supply chain and reduces negative instances like excess inventory or shortage of it. The price of the items fluctuates because of fluctuation in the market conditions, the demand pressures, and/or the availability of the product. For instance, a firm may look at the inventory turnover ratio to know exactly how often, and in what quantity an inventory is used during a production cycle or period. Analyzing the information and studying the trends ensures that the firm can lower costs incurred towards the purchase of inventory. Functionality is another goal/objective that can be achieved as the companies would be able to procure the right amounts of goods at the right time and the lowest price, by measuring purchasing performance.

Ans. 2. Some of the key or important purchasing measures that may also be relevant to the performance of the purchasing department are given below.

Cost Saving

There can be many ways through which a firm may procure the same product at a lower price, and whenever the goal is achieved it is saving of costs. For instance, the firm may replace a costly substitute with a reliable yet cheaper one, find out a new supplier, choose a lesser priced transportation medium or attain the cost-saving objective through any other measure.

Quality Improvement

Purchasing may also be done for improving the quality of the product or the supplies received for making the product. A different supplier may provide the firm with a better quality product. Negotiations with existing suppliers may result in the lowering of wastages, which is also quality improvement.

Improvement in Purchasing Process And Logistics

The purchasing process may be improved, so that time and cost expenditures are reduced. One such measure can be the implementation of an e-procurement system or an inventory managed by the vendor, among others.

Wastages and errors are reduced and efficiency is achieved when the purchasing orders are handled accurately and the controls are implemented in a timely way. The electronic order systems and/or E-Commerce solutions may help in the achievement of efficiency and cost-saving goals. The incoming flow of goods may be controlled by measuring the reliability of supplier delivery, JIT (just in time) delivery analysis, and in other ways.

Competencies of Purchasing Department

The purchasing staff should have adequate training and relevant background and competencies for carrying out the purchasing functions in an expert way. Training may also help in the improvement of these skills. The purchasing management cells should also choose the right communication structures, management styles, and collaborate on the reporting procedures, action plans, and strategies to attain the objectives.

Improvement in Transportation/Logistics

The purchasing department may also indulge in negotiation with one or more transporting firms to receive the highest cost benefits. When the cost related to transporting inventory to a production facility reduces, the manufacturing cost of the item also reduces.