In our previous Actionable Insights blog, we discussed QAD’s Inventory Value Action Center. Next, we will provide an overview of the Purchasing Commitments and Spending Action Center as well as the associated key performance indicators (KPIs).
Action Center Overview
Understanding the use of inventory spending is critical for planning and to ensure that money is being used wisely. Understanding spend and commitment can be invaluable in negotiating with suppliers and evaluating buyer performance.
When analyzing purchasing performance, it helps to understand the difference between spend and commitment. Spend is the monetary value of the items received, while commitment is the amount outstanding on open purchase orders. Together, spend and commitment provide a clear view of purchasing.
KPIs for Effectively Tracking Purchasing Performance
QAD Action Centers provide analytics to help both managers and users monitor metrics and KPIs. KPI highlights for the Purchasing Commitments and Spending Action Center include:
Commitments by Month: This graph shows the outstanding commitments by month and helps with understanding future cash flow requirements. It can also be used for buyers as a decision support tool since they may want to keep future commitments within a predetermined range. In this case, it could affect the use of blanket or contractual orders versus short term orders.
Spending and Commitments by Site: This highlights up to five sites with the highest outstanding commitment and consolidates any remaining sites into a single bar. This helps enable budgeting by site and comparisons of spend and commitment policies by site. It can be useful for identifying areas where existing policies may lead to future excess inventory.
Top Spending by Site: This KPI looks only at actual spend by item, helping to identify items and commodities where historically money has been invested. It can help ensure that purchasing policies by item are in line with company strategy.
Spending and Commitments by Commodity: This tool enables the company to plan inventory budgets by site or for planning policy and procedure changes that align more closely with company strategy. For example, if predictions for demand are falling, the company may choose to rein in longer terms on purchasing, or if they predict commodity shortages, they may want to increase commitments to help ensure the availability of critical items when they are needed.
Top Spending by Commodity: This KPI helps identify items and commodities where the company invests more of its inventory budget. This knowledge helps ensure that spend is in line with company strategy and forecasts. It can also help to identify inventory policies by commodity or site.
Commitments by Year by Commodity: Management needs to understand committed cash flow requirements, and this can show where money is allocated. It can also help with future planning, to ensure that production plans and sales forecasts are in line with commodities and vice versa. It is also useful for negotiations with existing or potential suppliers because it shows the company’s investment in items or commodities under discussion.
Spending by Quarter by Commodity: Analyzes spend on a quarter-by-quarter basis for each commodity for the year. This can help to ensure that buyer/planners for commodities are following guidelines and may also help show where changes in product mix affect costs.
Spending and Commitments by Supplier: Enables buyers to negotiate from a position of strength with suppliers for complete insight into historical and future business. It can also be used to fuel shifts to less expensive suppliers or to encourage process improvements at more expensive suppliers.
Commitments by Supplier: Often useful for leveraging concessions or discounts with existing suppliers because it shows the future value of the relationship to the supplier. May also help buyers decide whether an item should be single- or multi-sourced.
Spending and Commitments by Item: Helps identify items with the largest impact on inventory spend. This insight may spur the company to look for more cost-effective solutions. It may also drive changes in item/commodity inventory policies, cycle count policies or allocation of item responsibilities to buyers.
Top Spending by Item: Helps identify items that have had the most impact on inventory investments in the past. Helps identify potential excess or obsolete inventory, and may lead to changes in inventory ordering policies, cycle-count policies or buyer responsibilities.
The Importance of Effectively Managing Purchasing Commitments and Spending
Inventory investment is often the largest spend category for manufacturers, so it makes sense to keep a careful eye on top items, commodities and suppliers. Identifying the most efficient and effective sites can lead to overall improvements by sharing best practices. An enterprise resource planning (ERP) system built for manufacturers, like QAD Adaptive ERP with the Purchasing Commitments and Spending Action Center, makes helping companies easy and ensures that their purchasing budgets are working hard to help achieve company goals.
Which KPIs and metrics are most important to your organization? Learn more about QAD’s predefined Action Centers as well as best practices for each.