Purchasing ROI

Do you know what is ROI for Procurement Areas? What is it for?

What is the REAL RETURN that a Procurement Areas (Sourcing or Purchasing areas included) provides to a company? How is effective return measured?

Did you know that there is a relatively new KPI on the market, which has been disclosed and used by companies with the greatest degree of progress in their methodologies for monitoring costs and efficiency in their strategic and important areas of any company: the Procurement / Supply Chain?

Yes, it exists, and it is called ROI for Procurement/Supply Chain > It deals in a broader way the representativeness of the weight of Purchasing / Supplies areas in the company's costs, their effective return to the organization and how they can and should be monitored by the Financial areas of chain costs.

The ROI nothing more than an Indicator that aims to measure the financial return that the Procurement area provides to the company, measured through the savings generated in the commercial negotiations x the Total Cost (Budget) of the Area Procurement for the company, including wages, benefits, overheads, communication expenses, travel, etc .

Do you know how to measure? No ? Are you interested? ROI is calculated as follows:

ROI = Saving - Total Area Cost (Budget) / Total Area Cost (Budget)

Obviously before making efficiency comparisons, it is necessary to initially align the measurement assumptions (concept) of the reported savings forms, starting with Saving. Saving monitoring methodology can vary from company to company, between the purchase of Materials and Services and even for Equipment.

In the case of the example I report below, referring to Galvani's Procurement Area, ROI is obtained considering only Savings generated in the acquisition processes, being calculated as follows:

MATERIALS: Difference between FINAL VALUE - PREVIOUS VALUE brought to Present Value (VP).

SERVICES: Saving is calculated only by calculating the difference between the FINAL VALUE - INITIAL VALUE (lowest initial value, not necessarily being from the same supplier).

Although we understand that there are particularities of processes and that these can be very specific to each other, especially if we consider that there are different segments, which depend on the type of Industry or Service provided, the establishment of a Common Indicator between companies / areas can offer, although not ideally, a more standard way of measuring and comparing efficiency between areas of Procurement.

Also, it should be remembered that there are other generations of savings that can be delivered by a Procurement Area, among them, Cost Avoidance and Payment Terms (extension of deadlines for payment of purchases - without affecting the negotiated values). If there are also KPIs for these other ways of aggregating results, just add to the Saving, the results collected by these other 2 ways of obtaining results for the company.

Written by Edson Henrique