You need to get the purchasing function right

You need to get the purchasing function right

A good benchmark about the health of your procurement process is what your procurement negotiations are based on. If you are solely negotiating on price, you’ve got a problem.

In my last post, I talked about three key areas of the procure-to pay-process. Now I would like to dig a little deeper into the first of those Ps — the procuring part. Your procuring/purchasing strategy and processes are critical as they will have a major impact on your overall operating efficiency.

You need cohesion in the process starting before you actually make a purchase. A good benchmark about the health of your procurement process is what your procurement negotiations are based on. If you are solely negotiating on price, you’ve got a problem.  Procurement negotiations also need to include the terms of the purchase and focus on things like discounts for volume purchases. Upfront discounts often are the smarter approach for organizations than back-end rebates.

In order to provide flexibility in ongoing operations, many finance departments want to hold on to their cash so it can be put to work throughout the year. In procurement, that means centralizing purchasing and buying smarter by buying within controls. The result is that you can reduce costs and spending in the present rather than waiting for a big rebate check next year.

When it comes to procurement, it’s a good idea to periodically review your vendor list.  How many suppliers do you have for the same or similar products? Reducing the number of vendors could result in your being able to become eligible for volume discounts. Make sure to streamline the vendor list across all of your locations.

Reducing the number of suppliers can lead to a 9.18% reduction for general equipment and supplies, according to a report from The Hackett Group entitled, “The Benefits of Supplier Consolidation Extend Far Beyond Sourcing Savings.”

A very high percentage of your purchases should be made through your preferred suppliers using approved purchasing methods. I am not naïve enough to think that 100% of purchases will follow your company’s procurement policies, but the one-off purchases should be few and far between.

You should have a preferred supplier list and procurement policies for your indirect spend as well. Indirect spend (a.k.a. dark purchasing), which can account for 20% of your total overall spend, is very susceptible to the type of decentralized purchases that lead to increased spending, There are lessons to be learned from the scrutiny and controls that direct spend undergoes.

So when it comes to procurement, the best practices include having procedures and controls in place, consolidating your supplier list and making sure your negotiations include things like volume-based incentives.

Purchasing “right” is the first step toward improving your procure-to-pay process. Controlling purchasing puts you in a better place to make the rest of the process efficient and profitable.

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