Purchase Price Variance (PPV)

From an analytical perspective, Purchase Price Variance (PPV) is one of the crucial and reported KPI’s within spend management irrespective of industry. PPV helps in identifying fluctuations in the price(s) over a period of time. Purchase price of a commodity/item has direct impact on input costs for an organization and monitoring them closely will help in better control.

Price variances are calculated as the difference between negotiated price versus actual paid value during the procurement cycle. Two measures under scrutiny i.e. Negotiated Price and Landed Price of an item has to be calculated with common time baseline in order to provide accurate picture. Time series analysis is the most common method, but other analytical methods to identify factors that affected the price are performed through data mining methods.

At times, it is also measured against the standard cost of a commodity/item, which provides a different perspective to the KPI. In this scenario, the comparison evaluates cost of good sold against the price fluctuations.

PPV analysis, as a tool, educates procurement managers on dynamics of a commodity in the market with respect to price and various other factors. These additional factors are determined by business team, for example Vendor, Lot Quantity, Currency etc. which in turn can can help in deeper understanding and aid in future negotiations.

Critiques of PPV analysis point to the following items as prominent gaps that are inherent due to nature of analysis of this KPI

  1. Long time frame between the start and end point of transaction under scrutiny. Time frame between placing an order and receiving the product are usually weeks apart, if not months apart. In many instances contracts have staggered cycles spanning multiple time periods for analysis.
  2. Analyzing PPV is similar to performing post event analysis and fails to provide much information to make decisions upon that will have direct impact in immediate future
In ERP context, Purchase Price Variance is an expense that is calculated during procurement process wherein any difference in value is automatically split between Inventory and Expense accounts.