Why Purchase Price Variance (PPV) Should Be Banished From Procurement Measurements and KPIs [Plus+]

One of the biggest challenges to overall program impact and improvement in all but the most advanced procurement organizations are the raw elements that many procurement organizations measure themselves against: key performance indicators (KPIs). Of these, purchase price variance (PPV) is particularly obnoxious in all but certain cases. PPV measures the difference in price paid for multiple purchases for the same SKU, part or service. It is typically employed in standard costing environment in an ERP system for SKU-based items where actual PO prices are tracked compared to the existing standard cost.

This methodology is great for the financial accounting function. The PPV can be calculated easily by the system by accumulating the PPV until the new standard is calculated (and those variances posted to the appropriate general ledger account). A favorable PPV (i.e., price is less than the standard) is also known as a purchase price reduction (PPR). This all seems straightforward for the accounting department, but it’s not a great way to judge procurement performance, at least not on its own. Why?

There are numerous reasons why PPV can be such a misleading figure. In this two-part Spend Matters Plus series, we explain why PPV is a KPI that procurement organizations should stop measuring internal and individual performance against.

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