Finding More Profit: Focus on Purchasing

In today's economy, the ability to remain competitive is becoming more difficult. Many companies miss or underestimate the profit and cash flow impact of the money that is spent for purchased materials and services.

Most manufacturing companies spend over 50% of their total revenues on purchased materials and services. They have a significant part of their total assets invested in purchased material inventory, work-in-process, and finished goods. However, management attention and resources are usually focused on increasing sales and reducing labor costs. Both are worthy objectives, but there are a lot of dollars that can be dropped to the bottom line by using the leverage that already exists in lowering purchased prices for everything from production materials to operating supplies and services. If you have a person in your company responsible for purchasing, have you had a discussion about cost reductions, stocking programs, and other savings ideas? If the purchasing activity is not centralized, the people handling your dollars may lack proper training and skills.

Modern purchasing techniques have moved beyond getting three quotes and buying from the lowest priced supplier. Understanding the industries that comprise your supply base and analyzing the cost structure of key materials are just two actions that can lead to dramatic cost savings. Many companies are forced to compete in a world market, but still concentrate their purchasing locally, another missed opportunity.

There are five rights that should be the focus of your initial thinking about how effectively your dollars are being used:

  • Right supplier
  • Right price
  • Right delivery
  • Right quality
  • Right service

There is a lot of profit growth opportunity in developing the Right answers in the Purchasing area.

HCS Consulting
Herb Shields- 8/8/01