Measuring Purchasing Performance
By: Stephen Machin, CMA

Measuring purchasing performance can be a tricky thing.  The natural tendency is to use cost savings as the primary measuring stick, unfortunately this can, in some circumstances, lead to wrong decisions.  At ERA Canada when we make recommendations our goal is to recommend products or services that are ‘like for like’.  This means that the solution that we are recommending measures up in the 3 key areas. 

These areas in order of importance are:

1.      Quality – if the purchased products are of a lesser quality this can often negate all or most of the potential savings that you are expecting.  The additional costs may not be always readily apparent but can include rework, customer complaints, late deliveries and damage to your brand.

2.      Service – is closely related to quality but includes some additional issues that can end up costing more than the potential cost savings.  For example, cheaper courier services can often be found but if the service levels are such that your customers are complaining that their packages are not arriving on time this can affect your revenues.  Many customers may not even bother to complain, they will just start buying from your competitor. In some cases there may be a business decision to reduce the level of service and you may lose some customers as a result, but there is an overall net benefit.  Going back to the courier example, historically you may have shipped with 10:30am service but if there is no net benefit to the customer then end of day service should be sufficient and at a lower cost.   

3.      Price – while reducing costs is obviously the main objective it must always be taken into consideration with quality and service.  In addition, before making a decision to switch to a new supplier find out how long they will hold their prices.  If you are signing a contract, determine if there is a price escalation clause and, if so, make sure you understand the implications.  The savings from a low bid can quickly disappear if the vendor can bump their prices.  I  have seen cases where cleverly worded contracts allowed the vendor to raise most of their prices at their discretion and the client is locked in for 5 years with little recourse.

Whenever you embark on a cost saving program it is imperative that you calculate the net cost savings.  While this is not necessarily an easy task it can mean the difference between success and disaster.  You must be vigilant in analyzing all of the implications and the associated costs to ensure you will achieve your cost reduction objectives.