Purchasing - Best Practices
Ten Keys to Effective Purchasing
By Brian R. Robinson
Price increases are impacting companies at unprecedented levels. Utility costs have increased 30% over the last year. Escalating paper prices are affecting the cost of copy paper, letterhead and other printing costs. Health insurance increases over the last four years top 80%. What are your plans to keep profits at the same level, or even increase your profitability despite this increase in costs?
What are your plans to keep profits at the same level, or even increase your profitability despite this increase in costs?
¨ Reduce capital spending.
¨ Implement yet another round of layoffs, GM and Ford are currently
pursuing this strategy.
¨ Increase employee share of health insurance.
¨ Raise prices.
However, if you want to maintain your stature as a “best in class organization” you cannot continue to rely on the above four methods to improve your profits. Your competitors are increasing capital spending, adding employees, offering competitive benefit packages and actually lowering prices to their customer’s year after year. Their Secret – Implementing best practices in purchasing!
How long does it take to become a best in the world purchasing organization?
The short answer is, a very long time. That means inch-by-inch, day-by-day, price increase by price increase.
A better answer: best practices evolve over time – if you decide you want to become a master purchasing organization you have to recognize that change is inevitable, keep a positive attitude and passionately believe in the process improvement cycle.
We have identified and developed the following “Ten Keys to Effective Purchasing”. These keys have been developed by working with the some of the best purchasing gurus in the world, continuously researching companies that are named Purchasing Magazines best companies, and practicing what we preach by helping our clients implement these strategies.
- Improve your vendor relationships – They don’t stay the same from year to year?
¨ Avoid cozy or adversarial relationships with suppliers. Ball tickets and free lunches are great as long as your supplier is bringing great cost improvement ideas along with them.
¨ Is your door open to suppliers or are do you continue to shut them out. Sitting down with vendors once or twice a year to collaborate eliminates surprises from both you and them.
¨ Order in a manner that keeps the vendor’s cost low.
¨ Work with the best vendors, taking into account local, regional, national and global players for the goods and services you are purchasing.
¨ Competitive pricing is key, focus on the overall best total cost.
¨ Companies are working with too many vendors, find a great vendor or two and utilize your leverage by giving them all of your business.
¨ Develop an annual cost reduction plan; the best vendors will understand this concept.
¨ Vendors should enjoy working with you (payment policies, return policies, returning phone calls).
- Develop a scorecard for keeping track of vendors’ service, quality, delivery and pricing
¨ Track the quality, service and price performance of your vendors.
¨ Communicate the results of your scorecard to the vendors.
¨ Understand what is important to your vendors and make sure they understand what is important to your company.
¨ Involve the vendor in the design of your product from the beginning.
- Obtaining the right information = right sizing your vendor list and vendor costs
¨ Leverage your volume with your vendors.
¨ Purchasing and finance should form a team to identify current spending and where the greatest opportunities for improvement exist.
¨ Engineering, manufacturing and sales should be included to brainstorm ideas for product improvements.
- Create a purchasing staff with the following characteristics
¨ Analytical – great purchasing is based on the ability to roll your sleeves up and get into the details of the items you are looking to buy.
¨ Great negotiation skills – very few purchasing managers and buyers have had the benefit of negotiation training.
¨ Business knowledge – Understanding your business goals and the focus of your suppliers business is critical to making sure you reach your companies goals while providing what is necessary to help your supplier reach their goals.
¨ Compliance to policies – Creating purchase orders after the invoice has been generated is a waste of both your time and accounting’s time. How many rogue buyers do you have in your organization that are buying from non-preferred vendors.
¨ Legal knowledge – creating contracts that benefit the company, not solely the vendor, is not an easy process and requires training and understanding of the terms that must be met for a vendor to work with your company. You also have to monitor your vendors to make sure they comply with the agreements put in place.
¨ Ability to work in other parts of the organization (Sales, operations, finance).
- Get the executive team behind purchasing 100%
¨ Top purchasing executive should report to the CEO or COO, not be stuck behind another executive in your company.
¨ Top officials must have a direct line to purchasing so they can understand the impact of price increases will have on their business and make decisions as to whether increases should be passed on to your customers.
¨ Potential price increases need to be offset with decreases in other areas.
¨ Top executives may consider increasing the employee cost of group insurance.
¨ A team approach to purchasing helps to focus on the priority areas within a company.
- Enforce a preferred vendor list
¨ Support the purchasing manager when a tough decision needs to be made.
¨ The purchasing manager has found a great new vendor, better quality, better service, better pricing and, will take responsibility for parts inventory. Don’t nix this idea just because your neighbor is the current preferred supplier.
¨ Preferred vendor lists prevent your total vendor list from getting out of control.
¨ If every buyer continues to buy from those vendors they like to do business with, you will lose the leverage, the pricing and the efficiencies of consolidating your spend with one or two selected vendors for an expense area.
- Structure centrally led, but locally implemented teams.
¨ In order to obtain the best leverage available to your organization you will need to gather data in a central point so that you can evaluate your total spending by area.
¨ Once you have total spend by area you must put teams together that can help to identify the best suppliers for those areas.
¨ Once suppliers are selected, collaborate with them to see what ideas they have to help you achieve greater success.
¨ The local team will be critical to implementation of the suggested improvements.
¨ It is extremely difficult to implement a process improvement without local support.
- Develop strong negotiation skills
¨ Evergreen Clause – Organizations are burned every day by agreements that force them to use a supplier for another year despite the desire to switch to a new vendor
¨ Training – On going training and organizational development in the area of negotiation is key to developing a win/win relationship with your supplier network.
¨ Planning is the key to a great negotiation. Make sure that you always get your needs, mostly get your wants and frequently get the WOW! that makes the CEO happy.
- Use technology to propel yourself ahead of your competition
¨ Utilize e-mail over fax and phone when possible.
¨ The system you utilize everyday can handle incredible tasks and automate things that you are handling manually.
¨ Capture the correct data in your system and then tap into that data when you need to begin a negotiation.
- Design an incentive program that actually profits the individual and the company
¨ Incentives paid to your employees are critical to the ability of your organization to accept and embrace implementing change.
¨ What gets rewarded is what gets done.
In order to implement these best practices, I challenge you to develop an effective plan, form a team that will be compensated for their results, implement the plan and track performance. Once the plan is implemented, meet quarterly to share additional successes achieved along the way.
Imagine standing beside your customer and letting them know how your company is performing on the each of the “Ten Keys to Effective Purchasing”. Does your purchasing team have what it takes to be the best in the world or at least at a higher level than your competitors? As enterprises compete against one another, those with high performance teams will succeed, as they are providing your customers with the lowest total cost available.
Brian R. Robinson, CPA is the president of Cost Containment Strategies, based in St. Louis, Missouri. The firm provides purchasing, efficiency and tax consulting services that help firms take their profitability to a new level. The firm identifies savings opportunities, negotiates with vendors and implements the profit improvement initiatives.
Cost Containment Strategies is part of Alliance Cost Containment, a network of 25 offices across the United States, which has helped over 600 clients achieve $50,000,000 in annual savings. The firm works with manufacturing, non-profit and service organizations with over 200 employees.
Brian Robinson is a member of the Board of Directors of the Institute of Management Consultants and has developed training programs and presentations on the topics of negotiation and strategic purchasing. Brian may be contacted via e-mail at firstname.lastname@example.org. The firm's web site is www.alliancecost.com.
Ó 2006, Cost Containment Strategies. All rights reserved. Printed with permission.