The primary responsibility of a purchasing agent is to ensure sufficient supply and quality of required materials at the best price possible. The focus is on quality, material availability, inventory investment and pricing. In setting goals, the purchasing agent should remain focused on activities and metrics that drive improved performance in these four areas.
Whatever we are buying, we expect quality. Materials must conform to specifications to be useful. Often the cost of poor quality exceeds the actual cost of the material. Poor quality can lead to lost labor expense, warranty claims, possibly even injury. The purchasing agent should have a metric of supplier quality to ensure that the chosen suppliers are meeting standards. The metric should capture the number of defective products received from the supplier as a percentage of the total products received. A goal should be established with each supplier. The numbers should improve each year.
Two aspects to material availability deserve to be measured. The first focuses on how many material shortages occur. It's necessary to measure this to understand if the purchasing agent is ordering appropriate quantities of material at the right time. If not, the purchasing manager will need to intervene. if a grocery store runs out of a product and it occurs for two hours once every five years, it would not attract the scrutiny it would if it lasted for three days and occurred every two weeks.
The second aspect is reliability of supplier deliveries. This is measured by comparing supplier shipments against purchase orders. If the supplier ships the correct quantity on time, the order is considered "perfect". If the quantity or delivery date does not match the purchase order, this would count as a "miss". As with quality, goals should meet company objectives and show continuous improvement.
While a purchasing agent is responsible for ensuring that adequate supplies are on hand, it is important that they also be held accountable for keeping inventory low. Few companies have unlimited resources to invest in inventory. Thus, the purchasing agent must ensure that the total value of inventory is kept within limits. The most common measurement for inventory effectiveness is inventory turns. Inventory turns measures how many times in a given year the inventory is completely turned over. For example, there is a product that a company uses 12,000 units per year. For this same product there has been 1,000 units in inventory at any given time. The calculated inventory turns for this item would be 12 (12,000 divided by 1,000). A turn rate of 12 indicates that the inventory turns over once every month, or 12 times per year. The higher the turn rate, the more effective inventory is being utilized.
In purchasing, the difference between the standard cost associated with an item and the actual price paid is called purchase price variance, or PPV. PPV is a common measurable for purchasing agents to understand how well or poor that agent is performing relative to cost standards. To drive favorable PPV, a purchasing agent will engage suppliers to remove cost from the supply chain. An example could be in the instance where a purchasing agent reduces price by purchasing in a larger lot size, or if the purchasing agent was able to locate an alternative source that could supply at a more favorable price.