We are recruiting experienced candidates for the post of Purchase executive. we would like to offer them salary package as a combination of fixed and variable where in the variable factor shall be linked with their performance. The criteria for evaluation would be new vendor developments,savings in purchase, getting more credit from the vendors etc.
please let us know if this policy works well for the post of Purchase executives. if so please let us have some format

From United Kingdom,
Dear Rohit,

Since I provide consulting and training on <link outdated-removed> , let me give you my take on your post. The comments are as below:

a) Incentive for New Vendor Developments: - It is not just a question of developing new vendors, reduction in procurement spend because of introduction of new vendors that matters.

Risks involved: - In a zeal to get incentive procurement professionals may select a new vendor who can provide the material at low price. Nevertheless, what if the quality issues come up in the course of production? Will the cost of rework or cost of rejection go up? Will there be delay in meeting the customer's requirement? What about cost of switching the suppliers? Will you be able to measure that? Please ponder over these questions as well.

b) Savings in Purchase: - Yes, procurement department should constantly strive to reduce the procurement spend.

Risks involved: - Excess pressure on procurement professionals to reduce the price leads to concentration of their activities that give immediate results. This happens at the expense of strategic procurement activities which reduce the spend in the long term. What matters is whether purchase department has Strategic Procurement Plan (SPP) well in place.

c) Getting more Credit from the Vendors etc.: - This is the No 1 temptation of the management or finance department. Procurement professionals take a pat of their back when they negotiate for more credit from the vendors.

Risks involved: - While running any business, taking excess credit from the vendors is not a healthy practice. You must freeze some number when you measure Account Payable Turnover Ratio (APTR) and Account Receivable Turnover Ratio (ARTR). Business should be within the limits of these ratios. By taking excess credit from the vendors, you may fulfil immediate needs of the business, nevertheless, should the economy turns bad, what cushion you have to bargain with the vendors? You must reserve some credit period for the emergency purposes or industrial decline rather than grabbing everything today!

Final comments: - Well gentleman, success of the business depends how we can foster collaborative relationship with the vendors. Gone are the days when purchasers treated vendors as adversaries. Your company's growth depends on your vendor's growth as well. Do not expect you to grow at the expense of your vendors. Just focusing on customer satisfaction is not sufficient. In today's competitive world, vendor satisfaction has its importance. Have you conducted Vendor Satisfaction Survey (VSS) any time?


Dinesh Divekar

From India, Bangalore

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