The art of purchasing: a penny saved is a penny earned

Cutting your purchasing costs can add profit to the bottom line, but are you doing enough to maximise the savings? Ray Newell, a purchasing expert, shares his advice about cutting costs, increasing profit and making purchasing more efficient.

Big 30% reduction

Here are TurbineHQ.com, we think that companies can streamline their purchase order paperwork using our software. But that’s only the start.

Ray Newell is a co-founder of Oakwell Management Services, a specialist in purchasing and quality training and consultancy. He has worked with the UK’s Chartered Institute of Purchasing & Supply on small business training programmes, and has co-written a workbook on Sustainable Purchasing for SMEs. He explains its importance here:

 

What is ‘sustainable purchasing’ ?

Sustainable has a couple of meanings that only serve to confuse small business. Extract the word from purchasing for the moment and consider what it means:

It’s the challenge of using the skills of purchasing to lessen the impact of the environmental challenge and keep the business afloat by reducing costs/creating savings .

Do small businesses understand the importance of purchasing?

In general no — not fully. Most appreciate how margins are made, but they are unaware of how good purchasing can be used to enhance the bottom line much more easily than by increasing sales.

The key aspects of purchasing beyond cost control, such as quality, quantity and contract management are often completely ignored or considered irrelevant.

Our purchasing research with small and medium-sized enterprises (SMEs) indicates that most do not have a dedicated purchasing person and don’t, therefore, carry out most of the basics. Most common were lack of price reviews, lack of negotiation, and lack of sourcing and supplier management.

What are some of the techniques a small business can use to improve buying strategies?

There are many simple techniques that can be deployed but it is first important to understand the company’s competence in order to work out which strategy to adopt.

The quick test we deploy gives an indication of what needs to be done and then recommends courses of action.

Reply yes or no to the following:

  • I know the percentage of turnover spent on purchased goods and services last year
  • I know, to the nearest 10, the total number of suppliers used in the last financial year
  • I know, to the nearest 10, how many suppliers invoices were paid in the last financial year.
  • I can demonstrate practical differences between reducing expenditure and cost avoidance
  • I am absolutely confident that the business is getting the best deal possible from suppliers.
  • We can show good results from projects with suppliers to reduce our environmental footprint.

Three or more ‘yes’ -The basics are covered.

Three or more ‘no’ -Help may be needed.

How can they address issues such as late payment, which is common practice among large businesses?

Credit control is the downfall of many small businesses, as cashflow is critical and negotiation of payment terms with large business will always be challenging. Getting smarter with purchasing will reveal many techniques for such a dilemma, but each will be circumstantial to the individual case.

How has technology influenced purchasing for small businesses?

The introduction of small scale computing has revolutionised the SME’s management potential. Only a decade or so ago it would have been impossible to have a laptop to carry out all of a business’ management activity. Now it is possible to design products work out production flows, stock control and place orders on line.

By far the most important technological advance is the internet. Sourcing supplies, searching out the best deal, looking for international sources or scare materials are now only a click away. Disappointingly most SMEs do not use the internet enough to secure the best sources of supply by scanning the marketplace. Most would do well to learn from how eBay now works.

How can small companies balance ethical values with the need to maintain healthy cashflow?

Sustainable purchasing of legitimate products rather than copies from black economy sources can only be a recommendation here. We advocate following the Chartered Institute of Purchasing and Supply code of ethics in all circumstances, irrespective of cashflow.

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