Putting Procurement Performance In Context
How Do CEO’s Evaluate Procurement Performance?
PurchTips Edition #321 Click here for the printer-friendly version
Ideally, you should reconcile your procurement savings claims with changes in financial statements in order to build credibility with your CEO and CFO. That can get complex. But I have a little trick that can enable you to more easily discuss procurement performance with executives in less formal situations.
This trick involves comparing the changes in spend and revenue over time. It’s most effective when you can segment spend into direct spend and indirect spend.
Direct spend is part of an accounting category called “cost of sales.” Direct spend encompasses the purchase of goods and services that are incorporated directly into the goods and services sold by your organization.
Indirect spend is part of an accounting category called “operating expenses.” It encompasses the purchases of goods and services that support the organization’s operations and aren’t part of what the organization sells.
For each year over at least a two- or three-year period, determine the percentage change for:
- Direct spend
- Indirect spend
If the rate of increase of direct and/or indirect spend is less than the rate of increase of revenue then, generally, procurement would appear to be contributing to improved financial performance for the organization.
Also, compare direct spend with non-procurement related components of cost of sales, like direct labor. If those components’ costs are rising at a faster rate than direct spend then, generally, procurement looks good.
Then, compare indirect spend with the non-procurement related components of operating expenses, such as salaries. If those components’ costs are rising at a faster rate than indirect spend then, generally, procurement would appear to be performing well.
Are these the best procurement performance metrics? No. But can they enable you to intelligently speak with a CEO or CFO about procurement performance? Indeed!
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Copyright 2015. This article is the property of the Next Level Purchasing Association and may not be copied or republished in any form without the express written consent of the Next Level Purchasing Association. Click here to request republishing permission.
By Charles Dominick, SPSM, SPSM2, SPSM3