As a purchasing manager, it’s important to understand how CEOs and CFOs evaluate the performance of purchasing departments. If this type of discussion is taking place in a formal setting, a common approach is to reconcile your savings claims with changes in financial statements. Purchasing managers across a wide range of industries have found that approach works well for building credibility.
While it’s helpful to have a general rule of thumb to follow during formal situations, what happens if the subject of purchasing performance comes up in a less formal setting? Since this type of scenario does arise, the good news is there’s a simple but effective way to put procurement performance in the right context.
Direct and Indirect Spend
The best way to properly frame this discussion is to compare changes in spend and revenue over a period of time. In order to maximize the impact of this context, spending should be segmented into two categories. Those categories are direct and indirect. The first category falls under the accounting label of cost of sales. Any purchase that is put directly into what your company sells should be labeled as direct spend.
Transactions that fall into the indirect spend category are labeled by accounting as operating expenses. While purchases in this category aren’t incorporated directly into what’s being sold, they do play a supporting role in enabling the company to sell.
Once spending is broken into these two categories, the percentage change for each category can be calculated. Then those calculations can be compared to the percentage change of revenue during the same period. If revenue is increasing at a faster rate than either category of spending, it sends a clear message that the purchasing process is having a positive impact on the company’s performance. The procurement portion of direct and indirect spending can also be compared with other non-procurement metrics like direct labor or salaries.
How to Further Optimize Purchasing Performance
While any purchasing manager should feel proud if they have solid numbers to bring to the table, the best managers are always looking for ways to drive even better performance. If you’re currently in this situation, purchasing software can help. Bellwether Purchasing Software was specifically designed for purchasing managers just like you, it can give you all the customized work flows and other features you need to fully optimize performance.
Automating purchasing processes, eliminating the need for paper, saving time, taking control of maverick spending and enforcing an approval process are just a few examples of what Bellwether Purchasing Software can help you accomplish. So if you’re ready to take your organization’s performance to the next level, contact us today and let us help you find the best fit for your organization.
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