The purchasing function no longer acts as just a cost center but is one of the most value-enhancing functions in any organization, whether it be in the manufacturing, distribution, service industry or retail sector. The purchasing function plays a vital role in customer satisfaction and total end-to-end supply chain cost, so therefore, it must measure the activities of both its internal activities and its suppliers.
Many procurement metrics are valid for both products and services. Some metrics can be specific to a particular supply chain, such as pharmaceuticals or healthcare, and often using industry-specific measures can be more relevant and beneficial than generic measures. Some of the metrics in the following sections might not be solely-owned by procurement, but they are affected by procurement decisions.
Procurement is often responsible for defining and meeting cost-saving goals. The following are some of the metrics used to determine how well the organization is performing in the area of cost reduction, and how purchasing performs its activities against the budget.
Traditionally, reducing PPV was motivation for purchasing large quantities in order to receive price discounts, which is not always the best solution as it may drive up inventory carrying costs, and may conflict with other objectives, such as lean principles.
The measurement for Economic value added (EVA) is “the net operating profit earned above the cost of capital for a profit center” (APICS Dictionary, 16th edition). For purposes of this course, it recognizes procurement’s contribution towards revenue, operating costs and capital investments.