Purchase Price Index (PPI)
Developing and maintaining a Purchased Price Index and comparing it to external indexes are recognized best practices and essential Key Performance Indicators (KPI) to demonstrate Supply Management’s value added.
A rather common issue for Supply Management organizations is their desire to provide faster information that clearly shows that they are in fact doing a good job at obtaining best pricing from suppliers. This can be extremely difficult when cost reductions are difficult to obtain and prices are going up because of economic conditions that fall beyond the control of the either buyer or seller. One of the best ways to show Supply Management’s pricing performance is to compare the changes in prices paid by the organization to the changes in published Indexes. This article will explain this process by taking the reader through a typical scenario.
For the 1st time since taking over the Supply Management organization you have found that for the 12 month period just completed your prices for purchased materials and services has actually gone up 4 %. This is very disappointing since you have always been able to show a 3 to 5% annual cost reduction. Because of this increase in cost of goods and services your CEO has asked you to come to a meeting to explain to the Executive Board how you can justify your statement that Purchasing is doing a very good job at getting competitive prices for your major commodities. You feel that the best way to respond to the question is to develop a Purchasing Materials/Services Price Index. Developing the index will answer the immediate question and also provide you with a means to continuously support your belief that your Supply Management Operation is World-Class in obtaining best pricing. You will compare the Purchase Price Index that you developed for your organization to the Producer Price Index (PPI) for the same commodities and mix and hopefully show that your department is doing a better job than the industry in general. If not, the comparison will assist you in determining areas in which to focus improvement programs.
From your spend profile you have determined that the entire spend can be represented by the following four listed categories. You have selected for each category a specific part or service that represents well the price movement of the entire category and a PPI series that corresponds to the category selected.