HOW PURCHASING PROCESS CAN REDUCE BOTTOM-LINE COSTS AND IMPROVE CUSTOMER SATISFACTION

HOW PURCHASING PROCESS CAN REDUCE BOTTOM-LINE COSTS AND IMPROVE CUSTOMER SATISFACTION

Purchasing is the act of buying the goods and services that a company needs to operate and/or manufacture goods. Given that the purchasing department of an average company spends an estimated 50 to 70 percent of every revenue in Naira on items ranging from raw materials to services, there has been greater focus on purchasing in recent years as firms look at ways to lower their operating costs.  Purchasing is now seen as more of a strategic function that can be used to control bottom-line costs. Companies are also seeking to improve purchasing processes as a means of improving customer satisfaction.

 

The Traditional Purchasing Process 

The traditional purchasing process involved several steps – requisition, soliciting bids, purchase order, shipping advise, invoice, and payment – that have come to be increasingly regarded as unacceptably slow, expensive, and labor intensive. Each transaction generated its own paper trail, and the same process has to be followed whether the item being purchased was a box of paper clips or a new bulldozer.

 

The Traditional Purchasing Process

In this traditional model, purchasing was seen as essentially a clerical function. It was focused on getting the right quantity and quality of goods to the right place at the right time at a decent cost. The typical buyer was a shrewd negotiator whose primary responsibility was to obtain the best possible price from suppliers and ensure that minimum quality standards were met. Instead of using one supplier, the purchaser would usually take a divide-and-conquer approach to purchasing – buying small amounts from many suppliers and playing one against the other to gain price concessions. Purchasing simply was not considered to be a high-profile or career fast-track position – when surveys were taken of organizational structure, purchasing routinely rated in the lowest quartile.

 

The attitude has changed in recent years, in part because of highly publicized cases wherein companies have achieved stunning bottom-line gains through revamped purchasing processes. In addition, increased competition on both the domestic and global levels has led many companies to recognize that purchasing can actually have important strategic functions. As a result, new strategies are being used in purchasing departments at companies of all size.

 

Analysts observe, however, that in this new purchasing environment, a guideline known as the total cost of ownership (TCO) has come to be a paramount concern in purchasing decisions. Instead of buying the good or service that has the lowest price, the buyer instead weighs a series of additional factors when determining what the true cost of the good or service is to his or her company. These factors can include price, freight, duty, tax, engineering costs, letter of credit costs, tooling costs, payment terms, inventory carrying costs, storage requirements, scrap rates, packaging, rebates or special incentive values, and warranty and disposal costs.  To lower TCO, companies are taking a number of steps to improve purchasing.

 

Strategic Sourcing

Strategic sourcing is one of the key methods that purchasing departments are using to lower costs and improve quality. Strategic sourcing involves analyzing what products the company buys in the highest volume, reviewing the marketplace for those products, understanding the economics and usage of the supplier of those products, developing a procurement strategy, and establishing working relationships with the suppliers that are much more integrated than such relationships were in the past. During this process, the team conducting the analysis should ask these questions:

 

  • Why do we buy this product or service?
  • What do we use it for?
  • What market conditions do suppliers operate under?
  • What profit margins do suppliers seek to obtain?
  •  What is the total price of purchasing from a particular vendor (in other words, the cost of the item pus the costs associated with quality problems).
  • Where is the good or service produced?
  • What does the production process look like?

 

The products that are purchased in the highest volume will be the best candidates for cost reductions. This is because once those products are identified, the company can then justify the time and expense needed to closely study the industry that supplies that product. It can look at the ways key suppliers operate, study other business practices to see where the most money is added to the final cost of the product, and then work with the supplier to redesign processes and lower production costs. This maximizes the contribution that suppliers make to the process.

 

By knowing the market and knowing how much it costs for a supplier to do business, the purchasing department can get “target prices” on goods. If the supplier protests that the price is far too low, the purchasing company can offer to visit the supplier’s site and study the matter. As one purchasing executive explained, “We have 15 to 20 people who study the costs of everything we purchase. We know what it costs for a supplier to make a part, including all the overhead and the profit. So if a supplier comes in once we’ve given him a target price and says, ‘You guys are crazy,’ we send one of our engineers to visit the company. They look at the supplier’s production process to see if they can spot a problem that’s causing the supplier’s prices to be higher.  If necessary, our engineers help the supplier rearrange the production line to make it more efficient.”

Proponents argue that these “supplier alliances” can result in improved buyer/seller communication, improved planning, reduction in lead-time, concurrent engineering, decreased paperwork, and better customer service.

 

The alliances also can register significant improvements in product quality.  Buyers can build ready-defined quality targets into their target prices. It will then work with the supplier to improve the manufacturing process until that quality target is met. Such process can yield enormous benefits for buyers, including reduced inventory levels, faster time to market, significant cost savings, and reduced development costs. Not all suppliers can meet the high standards demanded in the purchasing environment. Some studies indicate that companies that adopt strategic sourcing have lowered the number of suppliers they use to have by an average of nearly 40 percent. What characteristics make a good supplier, then? If the supplier is willing to partner, then analysts have identified several traits that good suppliers hare:

 

  • Commitment to continuous improvement 
  • Cost-competitive
  • Cost-conscious
  • Encourages employee involvement
  • Flexible
  • Financially stable
  • Able to provide technical assistant

 

Analysts indicate that suppliers receive some benefits in the emerging purchasing dynamic as well. Reduced paperwork, lower overload, faster payment, long-term agreements that lead to more accurate business forecasts, access to new designs, and input into future materials, and product needs have all been cited as gains. Other observers, meanwhile, point out that some buyer-supplier relationships have become so close that suppliers have opened offices on the site of the buyer; an arrangement can conveniently result in even greater improvements in productivity and savings. Of course, companies are not going to form such “partnerships” with all of their suppliers. Some form of the traditional purchasing process involving bidding and standard purchase orders and invoices will continue to exist at almost every company, and especially at smaller companies that do not have the financial weight to make large demands on their suppliers.

 

Empowering Teams

In addition to strategic sourcing, there are other methods companies can use to improve purchasing. One is creating cross-functional teams that involve purchasing personnel in every state of the product design process. In the past, purchasers were not involved at all in the design process. They were strictly instructed to purchase the necessary materials once a new product has been created. Now, purchasers (and suppliers) are increasingly included from the start of a new product process to ensure that the products needed to create product are readily available and are not prone to quality problems. Suppliers tend to be experts in their field, so they bring large knowledge to base to the design process that would otherwise be missing.

 

These teams have broken down barriers and helped abolish the old manufacturing method that was known as the “over the wall” method of production – each business unit would work on a project until its position on the job was completed. It would then “throw the product over the wall” to the next functional team that was waiting to perform its part of the manufacturing process. The new cross-functional teams often include personnel from purchasing, manufacturing, engineering, and sales and marketing.

 

Purchasing teaches other members of the team how to deal directly with suppliers, cutting the purchasing personnel out of the loop. This is important in that it eliminates much of the time-consuming work that buyers has to deal with  (soliciting bids,  creating purchase orders, etc.) and frees them to concentrate on the part of their job where  their expertise most pays off: finding suppliers and negotiating prices and quality standards. Purchasing should be concerned with the strategic planning aspect of procurement process. Buying itself deals with the daily transactions and replenishment actions that should be performed as close to the company’s end user as possible. 

 

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Bernard Taiwo

I am Management strategist, Editor and Publisher.

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