Cost Reduction in Purchasing

 

Authored by Khizar Farooq

 

A detailed overview of expenditures is crucial to effective procurement. By looking at all the aspects affecting the prices of your products, you will be able to identify where costs can be cut.

Generally, the purchasing department’s goals are similar to those of anyone who buys something: Get the best possible quality of all supplies, services and equipment at the lowest cost. Most often, the purchasing department is that part of the procurement section that handles the supply chain process. To ensure quality and to prevent unethical practices, purchasing is usually separate from receiving and accounts payable.

Purchasing departments have changed over time. Historically, they issued purchase orders for all supplies, services, equipment and raw materials, but to save costs they began to put in place "master" agreements for repetitive orders, and they streamlined other routine tasks. This led to a larger role for purchasing departments as strategic sourcing managers who are concerned with purchasing large capital equipment, bidding processes and negotiating with suppliers. 

Today, purchasing departments often dominate supply chain management. Typically, they help other departments identify their needs, manage the requisition process and source competitive prices, and generally act as controllers to ensure adherence to budgets.

Traditional procurement and electronic procurement both have advantages and disadvantages. Procurement is generally done face-to-face, or via telephone, while e-procurement is generally done online. But that simple answer hides many factors.

Procurement is really a collection of processes that involve many steps and interactions with the other departments of a company and with suppliers. Because purchasing costs typically run to 50% of operational costs, the procurement process provides many opportunities for cost savings that can make a great difference to a company's bottom line. The rule of thumb is that a 5% savings in purchasing costs can increase profit by 50%, and would equal an increase in revenue of 50%, or a reduction in overhead costs of about 20%. 

That is why the procurement process has evolved. Traditionally, procurement was paper- and conversation-based, usually with procurement officers interacting with long-time partners or well-known suppliers and purchasing at fixed prices. In recent years, this has changed somewhat to become a strategic function: Procurement officers seek suppliers that fit with a company's overall strategy. 

E-procurement involves moving the procurement process online to cut out steps and save money. For example, traditional procurement involves getting quotes and then approval, probably from finance, as well as a purchase order, which could take more than a week.

With e-procurement, this process is simplified and speed up considerably, thanks to real-time interaction with per-approved suppliers and trading partners, who can be anywhere in the world. With online purchasing, the purchase can be approved online and the order completed within minutes; the required item often arrives within days. 

In business, time is money, so the more a company can reduce staff time involved in purchasing, and the more quickly it issues a purchase order, the more it can reduce operational costs.