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What is PPV in Supply Chains?
anaging spending is a crucial component of effective supply chain management. One of the most important metrics used to measure this is purchase price variance (PPV), but what is PPV and why is it important for supply chains?
What is PPV?
Purchase price variance, also known as PPV, is used in supply chain procurement to show the difference between the standard price of a purchased item and the actual price of that item.
PPV is one of the most important metrics in procurement because it measures how effectively goods and services are procured in terms of cost savings to reduce loss or generate profits.
A PPV can be negative, meaning less has been spent than was expected or forecast, or positive, meaning more has been spent than was expected or forecast.
How is PPV calculated?
Purchase Price Variance is quite simple to calculate:
(Standard price – Actual price) x Quantity purchased
For example, if you were to purchase 1000 components for £5 each, but the standard price of those components is £5.50, then you would have a negative PPV of £500:
(5.50 – 5) x 100 = 500
Why is PPV important?
PPV is an important metric for supply chains to use because it provides a much-needed measurement for your procurement activities. Analysing your business’s PPV allows you to see where you are losing money or missing opportunities to increase your profits. Even small variances in individual products can amount to significant profits when totalled across all purchased items.
What factors can affect PPV?
There are a number of factors that can affect a positive or negative PPV, such as:
If there is a material shortage or distribution problems, then the prices for in-demand items might rise, meaning businesses have to pay more than they initially forecasted.
Suppliers may raise the price of high-demand items and, conversely, may sell off stock at a lower price if there is less demand to try and move more units, which can result in a negative PPV for the buyer.
New products or materials
If it is the first time purchasing a product, or the product is new to the market, there will not be much data available to determine what a standard price should be for the item, making it difficult to calculate PPV.
There will be occasions where the products you need are available at a discount price, such as a supplier holding too much stock and needing to offload. In these instances, you will be able to achieve a negative PPV, potentially for a high volume of products.
If your business has significant purchasing power, then your procurement team should be able to leverage this to get better deals from suppliers as they will not want to lose a valuable client. Conversely, if you have a lower bargaining power, it is unlikely you will be able to negotiate the best deals with some suppliers.
Tiered pricing, where suppliers charge less for products when you buy a certain volume, or minimum order quantities can affect PPV. This might mean you need to buy more than you anticipated to reach the best tier of pricing, which could be detrimental if you do not need the stock.
PPV is an important metric for supply chains to measure the effectiveness of their procurement activities and potentially boost profits. Monitoring your PPV is a crucial part of component sourcing, which we can help with. If you would like to learn more, please contact us.