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October 26, 2012
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Procurement Best Practices 3: Understanding Procurement Cost Analysis


Procurement Management KPIThe purchasing department carries a huge responsibility on its shoulders. It must find goods and services that fulfill the company needs, are reasonably high in quality and at a price point that stays within budget. In order for purchasing to perform at optimum levels there must be a way to monitor the specifics of how each dollar is being spent. Today’s busy global procurement manager needs to have a basic understanding of cost drivers and how they impact each step of the supply chain. The best measurement by far is the procurement management KPI or Key Performance Index. 

There are several key indicators that can help management get an idea of the overall purchasing habits along the chain. There are specific things to watch out for in the procurement cost management process that allows you to see where the process may be weak and leaking money. 

Supply Quality 

It is of vital importance to understand how much you are spending on good quality products, and how many defective items are wasting you money. Identify the amount of defects per order so that changes can be made to improve quality and reduce errors. 

Order Quantity 

Keep track of order quantity levels. You should know whether or not a supplier is delivering too many or too little of what was ordered. If there are mistakes in quantity, is it rare or does it happen frequently? If the latter is true, you should investigate why the supplier keeps messing up your orders. 

Delivery Time 

Evaluate how often vendors are meeting your delivery times. If there are consistent slow downs or problems with delivery, these need to be identified quickly. Failure to meet scheduled delivery times can cost money and create customer service problems for your business. Are delivery times slower because the vendor has a problem on their end? Or is the problem created because your organization is not giving the vendor adequate notice to fulfill orders? 

These and other key indicators can help you figure out what the main cost drivers are in your purchasing process. By consistently evaluating procurement management KPI you’ll be able to pinpoint where there are specific problems that can be resolved.

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Procurement Best Practices 6: Implement a Cross-Functional Approach