How to Measure Purchasing Performance

In recent years, PURCHASING DEPARTMENTS have begun to play a more significant role within many organizations. A big driver of this shift has been the realization by companies of all sizes that purchasing can actually provide a competitive advantage. As a result of this increased significance, it’s important for companies to understand how to properly measure purchasing performance.

The simplest way to look at purchasing performance is to evaluate how much money this department saves for the company. While there’s nothing inherently wrong with evaluating performance in this manner, it’s generally not an approach that will provide full insights into the purchasing process. Since there’s a lot of value in gaining those deeper insights, we want to look at a few of the best ways to fully measure purchasing performance:

The first of the three metrics we’re going to look at is efficiency. This metric doesn’t look at what is being purchased by the procurement department. Instead, efficiency is all about measuring how much this department is accomplishing in relation to their budget. A procurement department operating with efficiency below their budget should be recognized for their great work, while a department that’s blowing its budget warrants an in-depth review.

The second metric that’s useful for evaluating purchasing performance is effectiveness. A common shortcoming of purchasing performance evaluations is they focus too much on price. The problem with evaluating performance based on price is there are a lot of market conditions that can cause fluctuations outside of the department’s control. Effectiveness solves that shortcoming by instead focusing on inventory turnover and liquidity.

The last metric we want to touch on is functionality. The role of functionality in a purchasing performance evaluation is to see how good of a job procurement is doing of getting the right items at the lowest price when they’re needed.

Purchasing is an activity that generates a lot of data. So when the time comes to measure performance, it’s not uncommon to feel overwhelmed by the task of trying to make sense of all this data.

Because data overload is a common issue for companies of all sizes, the good news is there’s a proven solution for dealing with it. The solution is to use purchasing software. Not only is purchase order software the absolute best way to maximize efficiency, but when the time comes to measure performance, data can be wrangled and organized into useful reports with just a few clicks.