![]() ![]() The total cost was not a good decision for the business, but the procurement person got his bonus, so he was happy.”Īlso, slavish focus on PPV can put pressure on a supplier to take a margin-reducing price cut or make tradeoffs that can impact design and quality. And, there are direct costs associated with renting more storage space. Also, there’s a question of whether they would have to scrap half of that product over time. “I’m sure the transportation cost on that big of a shipment was much higher. “So, the PPV on the product was down,” Burkitt says. ![]() Burkitt cites a Canadian company that incentivized its procurement department exclusively on PPV: A single bag of a product was enough to get the company through a year, but to meet a PPV target, a buyer purchased several years’ worth - and storing the sudden abundance of the product required renting additional space. The most indignation regarding PPV perhaps occurs when hitting a target adversely affects performance in other areas, like total cost. So, PPV is not much help there, either, but when it gets applied as one broad brush stroke, it leads to inefficiencies.” When a product is being phased in, standard costs are still being determined. When (a product) enters the end of its life cycle, PPV doesn’t make much sense because costs go up as the product is phased out. “PPV is relatively meaningless in value engineering because that’s when standard costs get changed. “An organization buying high volumes of a product that is relatively stable is when PPV is best,” Burkitt says. It’s less effective, critics say, with highly volatile commodities and long transaction time frames, and it’s a poor gauge of life-cycle costs. PPV is designed to identify price fluctuations for a commodity or item, helping a procurement organization control input costs. But they add other metrics as incentives for procurement organizations.” Limits of the Metric They still use PPV: I’m unaware of any organization that's willing or able - or even thinks it a good idea - to dismiss it entirely. “The organizations that do best at managing that are the ones who put other metrics in place for their procurement team. So, when we look at it as the primary driver for purchasing people, we're incentivizing them to do something that is not necessarily in the best interest of total costs. There are all kinds of things that might lead to different costs that are not captured by PPV. “And that's not necessarily true when you factor volume spending, inventory costs or logistics costs. “In a lot of companies, PPV is counted as a direct cost savings,” Burkitt says. ![]() As a result, mature procurement organizations and finance departments recognize the limitations of PPV but still include it in their suite of cost, spend and savings analytics. While PPV remains a valuable red flag for price changes, Burkitt says, too many other cost elements are left out of the equation. PPV - the difference between the standard price and the actual price, multiplied by the number of units purchased - is not an obsolete metric, says Lane Burkitt, founding director of 1 Lane Road, a Prescott Valley, Arizona-based supply management consultancy. If they are blinded by PPV targets - and the bonuses that come from hitting them - supply managers threaten to increase total costs and strain supplier relationships, the critics say. According to a 2014 survey by Institute for Supply Management ® (ISM ®), PPV is the metric most used by procurement organizations - a popular measurement tool, but also a polarizing one.Ī sampling of opinions from the supply management profession and academia illustrate the divide: Opinions on PPV range from it being “the only believable measure of purchasing performance” to a “stupid” metric that “should be banished” from the procurement KPI library. The Monthly Metric is approaching its third birthday, and it’s taken that long to cover what is considered one of the most fundamental procurement analytics: purchase price variance (PPV). ![]()
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