While I am firmly convinced that more money is made on the sell side than the buy side there are still certain purchasing disciplines which must be adhered to, to maximize profitability. Some of the things I’ve learned about the purchasing side of the business over the last 35+ years include:
- Always issue a purchase order for all purchases over $100. It isn’t always practical to issue a purchase order for a purchase less than this because many times under $100 purchases are done at the spur of the moment and out of necessity. However, all purchases for inventory and all larger purchases such as a set of truck tires should be done via a purchase order. Why? Simply stated, unless your business is tiny and you have a photographic memory you can’t just look at a vendor invoice and remember if that was the price you were quoted when placing the order. And, without needing a price to put a purchase order, a lot of people don’t even ask the price for things they buy. Especially if it’s not their money. Over 20 years ago I read a study that showed that companies that always issue purchase orders made almost 5% more pretax profit than companies that rarely or never issue purchase orders. That’s a lot of profit to leave on the table due to a lack of discipline.
- Pay off of your purchase order not your vendor’s invoice. Why? Aside from the obvious reason that you don’t want to pay a penny more than was on your purchase order another good reason is you don’t want to pay for more items than you ordered. Many times a supplier will ship you a quantity that is convenient for them to ship versus what you ordered. For example, if you ordered 278 widgets but they come in boxes of 50, most suppliers will just send you six boxes. You end up with 22 more widgets than you ordered. That might be acceptable to you if this was a stock order but if it was a special order and you don’t normally sell that particular widget what’s going to happen to the 22 extras you got but didn’t order? Answer- -they will sit around for years until they are thrown away, donated to a charity, or deeply discounted. When a supplier ships us more than we ordered we only pay for what was on the purchase order and tell them that they can pick up the overage or we can ship it back to them at their expense. Most of the time they just tell us to keep the extras. That’s why we almost always have an inventory gain when we take our year end inventory instead of having to take an inventory write-down.
- Pay off of invoices but reconcile vendor statements at least quarterly. Most of our suppliers don’t provide monthly statements anymore unless they are requested. We request them at least quarterly. If you don’t get a statement it’s easy to overlook credits which have been issued to you but not taken. This is another profit leak that needs to be plugged.
- Have a new vendor negotiation checklist and use it. The time to ask for marketing allowances, rebates, extended payment terms, extra discounts on opening orders, sponsorships for golf tournaments and other customer events, etc. is when you are in the initial negotiations with the new vendor. At that point they want to land a new account and have a hard time saying no. Once you’re already doing business with them it’s much easier for them to say they don’t have the budget for such things. We have a checklist and we use it religiously as we negotiate with each new vendor.
- Mean a lot to a few instead of a little bit to everyone. My father taught me this when I was working for him in high school in his commercial roofing business. You don’t want to put all your eggs in one basket but, on the other hand, you don’t want to buy from so many vendors that you dilute your purchasing clout. We like to have a main vendor and two secondary vendors. Keeping each product category to a maximum of three vendors cuts down on inventory, increases inventory turns, and you end up meeting with less vendors. Who among us wouldn’t like more time?
- Join a buying group. A lot of buyers like to think that they buy better than anyone but unless you’re the head of purchasing for Home Depot, guess what, you don’t! If you are part of a buying group you take advantage of the collective purchasing clout of hundreds, if not thousands, of members. Plus the buying group has professional buyers who do nothing but negotiate and who have more purchasing power than you do. If you think you are buying better than them you’re kidding yourself.
What other purchasing tips do you have? I’d like to hear from you.
© Copyright 2010 by Jim Sobeck. All rights reserved. This information may be reproduced as long as full credit is given to the author.