Part of running a business means spending on inventory, goods, supplies, capital equipment, IT systems, communications, and services. Each month, these necessary expenses means money out the door, and the more you spend, the less cash you’ll have to put towards other strategic initiatives.
By spending less in your regular purchasing, you may end up with more money to invest elsewhere in your business. One way to cut fat — not muscle — by getting smarter about your procurement operations.
Revisit vendor relations and strategies
Habit can be a great tool for efficiency, but may also contribute to sloppy operations. Reevaluation of suppliers is standard procedure in quality control purchasing. Consider the same approach in reevaluating your vendor relations, including:
- Key suppliers may have increased pricing over time, considering your account a “safe” one.
- New alternatives, either from existing vendors or competitors, might satisfy your needs at a better cost, or you might find advantageous quantity discounts.
- Some suppliers may offer vendor-managed inventory to hold products in a separate part of their warehouse. You don’t pay until you take an item to fill a sales order. You get the advantage of lowering inventory investment while maintaining fast availability.
- On-time delivery, financial stability, quality of goods, and service levels also may affect the total cost of purchasing. Vendors that ship defective items cause you to lose time in returns and miss sales opportunities.
- A company with warehouses closer to you may be able to provide rapid response to your inventory needs.
- Between two vendors with similar pricing, the one that it is easier to do business with is the one that is more likely to save you money.
Split core and convenience ordering
Vendors have two rough categories of goods and services: core and convenience. Core offerings are items fundamental to a vendor’s business. Convenience items aren’t a mainstay but might command higher prices and margins because customers don’t want to go to other sources.
For example, an auto parts business with spark plugs, alternators, and mufflers as core items might have for convenience bolts and non-specialized tools. When you buy brake pads, you might remember you needed a 10-millimeter wrench and pick it up there rather than travel to another store.
Convenience buys may make sense if they are a one-time expense, or the time to research a lower price might be better used differently; however, if you need something regularly, buy it from a vendor for whom it’s a core item that must be competitively priced. Better pricing will pay off in the long run.
Take a step back and examine your purchasing strategies. Anything you buy should directly support corporate strategy. If someone in your organization can’t adequately justify a purchase, it shouldn’t be made.
To help cut waste, rationalize inventory levels; only have enough on hand, or quickly available, to cover seasonal, cyclical, or peak demands. At the same time, levels should be as low as possible to achieve these goals. The less money tied up in inventory, the more is available for other uses.
Waste happens in other spending areas, too. Considering having a service perform a full utility audit to see where there may be incorrect billing or waste in electric, water, or sewer. Many consultancies perform the analysis for free and make their money through a percentage of the savings they help you gain (which suggests how often businesses pay more than they should).
Benchmarking is the practice of comparing performance to a reference to see how your organization does by comparison.
What seems like a normal level of spending in any area, whether it’s inventory, computer technology, or legal services, may be significantly off from what your peers do. There may be good reasons your expenses in a given area are higher than competitors, but it may also be a signal of spending too much.
There are two aspects to benchmarking. The first is to know and calculate standard metrics widely used in procurement. They include the average cost to process a purchase order, percentage of suppliers that provide 80 percent of spending, the percentage of purchasing budget that is department operating expenses, and cost reduction savings as a percentage of total purchasing spending.
The second is getting access to data from a wide array of organizations in your industry to see how you stand. Get access to the information through benchmarking tools from third-parties, whether analyst firms or professional organizations. The tools are software you use to compare your metrics to the subset of your industry that comprises your peers.
Improve your negotiation skills
Most people in business, including those who work in purchasing, think they are good at negotiating. While they may have natural talent, there are common misconceptions that may work against you. For example, letting the other side go first means you may give up control of the process and be unlikely to get something positive in return. Or you may assume that the other side saying no means the end of a negotiation, when it may be a chance to continue the process and change someone’s decision.
Even people with strong natural aptitude need training to become truly effective in negotiation. If your purchasing people haven’t had training, get it for them. The return on that investment may be immense.