Martin Murray, About.com Guide
Administrative costs are the basis for measuring purchasing efficiency. This performance measurement does not relate to the amount of purchased items that the department has procured. The measurement relates to how well the purchasing department is performing in the activities they are expected to perform against the budget that is in place for the department. If the purchasing costs are within the budget then the efficiency of the purchasing department will exceed expectations. If the department is using funds over and above the budget then the purchasing function is not efficient.
The price that the purchasing department paid for an item is not necessarily a good measurement for purchasing performance. The price of an item may fluctuate due to market conditions, its availability, and other demand pressures; therefore the purchasing department may not be able to control the price. A popular method of assessing purchasing effectiveness is to review the inventory turnover ratios. The ratio measures the number of times, on average; the inventory is used, or turned, during the period. The ratio used to measure the liquidity of the inventory. However, this is not always a great measure of purchasing effectiveness as seasonal requirements for having items in stock can make this measurement inaccurate.
Purchasing performance can be measured against the functional requirements of the purchasing function. The primary function of the department is to provide the correct item at the required time at the lowest possible cost. The performance measurement can take into account these elements, but it does not take into account factors that may relate to the supplier stability, material quality issues and supplier discounts.
performance of the purchasing function can be measured using a variety of
measurements. A company can decide which of these measurements of effectiveness
are relevant to the performance of their purchasing department. The
measurements can include,
A number of studies have been carried out on purchasing performance and the results have noted that there is no one method that will cover every purchasing department. However, there are a number of key measures that are found to be common in evaluating performance, namely; cost saving, vendor quality, delivery metrics, price effectiveness and inventory flow. Although these key measures are common, the weight placed on these measures is by no means uniform and will vary between industry to industry and business to business. In addition the importance of these measures to the overall effectiveness of a purchasing department will change over time and therefore need to be assessed and modified on a periodic basis.