Best practices for buying goods and services
Read time: 5 minutes
Whatever your line of business, how you acquire goods and services is a make-or-break factor for success. Small and medium-sized companies typically spend between 45% and 65% of their sales revenue on procurement of raw materials or services.
Even if you reduce your procurement costs by just 1%, the savings can be considerable.
It's not surprising that procurement is one of the most important elements of supply chain management, which is essentially how you manage the flow of goods and services—even information—among internal and external suppliers, distributors and customers.
The challenge is to be sure that procurement doesn't drain your business of cash. This is particularly relevant now since emerging countries such as China and India are putting pressure on Canadian entrepreneurs to lower their costs and be more flexible.
Here are some best practices to guide you in the procurement process. By making some basic changes, you can aim to cut your procurement costs by 5% to 15%.
Improve the way you buy
You don't want everybody picking up the phone and calling suppliers. Manage your acquisitions systematically, either through a purchasing department or by assigning that responsibility to a particular employee. It's also important to have a clear administrative process that outlines the rules of buying.
Conduct a spending analysis
A detailed review of how you spend is crucial to effective procurement. Be sure to look at all the factors that affect the prices of your products, such as:
- Cost of raw materials
- Inventory costs (interest, space requirements, heating, extra handling, extra manpower, insurance)
- Taxes and tariffs
- Transportation expenses (inbound and outbound) including freight forwarder fees
- Supplier charges
- Payment terms
- Third-party warehousing and handling costs
Do a demand analysis
Find out your company's essential needs to ensure that you're focusing on critical demands. This may require you to overhaul internal policies to include new criteria that determine what is essential when it comes to purchasing. For instance, do you always need new equipment, or might used or refurbished equipment do the trick?
A demand analysis also means that you need to focus not only on cost but also on quantity. Why have items in inventory that you are not going to use for six months?
Buying from lower-cost countries—be careful
Look at options such as buying cheaper goods and services from abroad. But keep in mind that procuring from foreign suppliers comes with additional costs such as shipping, logistics or expenses associated with customs and duties. Fluctuating currency rates will also have an impact on your business.
Reduce supply complexity
Another strategy is to buy more standard parts, goods or services from suppliers. Customized items invariably cost more.
Talk to your suppliers to be sure that your purchases fit your basic needs and that you're not overspending on unnecessary customization.
Establish strategic partnerships with fewer suppliers
If you deal with fewer suppliers, you'll save time and resources. You're also more likely to have better bargaining power when it comes to negotiating contracts.
Your supply partners will appreciate and value your business and be more flexible when it comes to adapting to your needs. Make sure that your suppliers work with you closely, for example, to improve the procurement process or conduct R&D. Your partnership should be mutually beneficial.
When you negotiate, keep in mind that a win-win situation is critical for both parties if the relationship is to thrive. Trust is essential to generating a continuous stream of value-added activities from your suppliers.
Evaluate your suppliers regularly
Establish a system to assess the performance of your suppliers on a regular basis. Companies often use standard forms that help them review factors such as flexibility, just-in-time delivery, consignment inventory, costs and quality of service. A written document also gives your suppliers a roadmap to improve their performance.
Train your employees on procurement
Establish a procurement training program that includes such aspects as negotiating contracts and following company policies. Negotiation skills are particularly important to ensure that you're getting the most from your suppliers. Training also ensures that your key procurement personnel know your expectations and are accountable for their actions.
As an entrepreneur, you now have access to many technological tools that can streamline your procurement process. The initial expense will generally give you long-term benefits. However, since business cycles are becoming increasingly fast, a good and accurate information system is important.
Look at integrated software such as ERP and accounting systems, supply chain management, warehouse management systems (WMS) and supplier relationship management systems (SRM), as well as Web 2.0 applications that enable suppliers to access product specifications and transmit invoices, and auction sites where you can bid for the best price.