Question

1. Cost and purchase price are the two different measurements companies use to evaluate the purchasing performance. What is the benefit of developing performance measures that focus on cost versus purchase price? If the cost is a better performance measurement than cost, should purchase price be used as a performance measure at all? Why or why not?

2. What is your understanding of the difference between effectiveness and efficiency measures? Are these two measurements independent from each other? When should a firm focus on purchasing effectiveness measures? When should a firm focus on purchasing efficiency measures?

Answer 1

Performance measurement - Performance measurement is used to motivate the manager and it employees to take decision keeping in mind the benefit of the organisation. Performance measurement helps management to evaluate the performance in the form of results obtained with the given input so that they can work on the key areas to improve and take important measures in order to obtain the required output.

Benefits of developing performance measures that focus on the cost price verses purchase price.

Suppose a company is producing certain amount of goods and we need to develop the performance measures for the production of these goods that focus on its cost. So following are the benefits

a) Improves communication- As manager uses direct form of communication in order to instruct employees regarding production leading less chance for miscommunication which hamper thr productiona and indirectly the cost.

b) Helps in recognising the best talent among the employee- while overviewing the process of production the manager can immediately recognizes the top talent which are highly contributing in the process which further uses their knowledge in lowering the cost of production.

c) Identification of underperforming individuals - As it recognizes the best talent among the team it also identifies the individual that contributes to their lowest in terms of capacity thus helps in elivating such individuals from the process for its smooth running.

d) Helps in increasing the productivity of the employees - when the overall cost of production is reduced the employees get motivated and works even more harder which indirectly increase their efficiency or productivity to work for much better results.

If the cost is better performance measurement than purchase than purchase price should not be used as a performance measurement at all because

• Cost price is the first contituent as it is calculated before the calculation of the purchase price.
• If the cost performance measurement is poor than it will be of no benefit to use purchase price as performance measures.
• Pruchase price is adopted in firms where their is lack of cost details.
• It cost provides the overall view of the firm production capacity

The difference in effectiveness measures and efficiency measures is that with effectiveness we meant to do the right things and with that of efficiency measures we meant to do the things right with the help of effectiveness measure the company acn take the right decision in order to achiece to aimed target and with that of efficiency measures the company can improves and alter the things in order to achieve the desired result.

The firm should focus on purchase effectiveness measures in order to increase the purchases of their items with the help of purchase effectiveness the firm can increases its supply chain by reducing the cost of raw material

The firm should focus on purchasing efficiency measures in the following situation

a) When the Purchase is reducing due to the high and competitive prices

b) When the supply of goods and services are reduced due to the increased cost of raw material.

c) In case of increased demand of their goods and services.

d) In order to build good supplier relationship in the market.

e) In order to understand its inventory carrying cost.