It’s easy to fall into a buying and shipping rut, using the same vendors and freight companies year after year without evaluating whether your choices are cost-efficient.
I spoke recently with purchasing expert Robert Porter — a longtime purchasing manager who now advises small to mid-size businesses as a managing consultant with accounting firm Goodman & Co. — to learn more about how purchasing reviews can save companies money. In these tough times he says more companies are casting a critical eye on their purchasing habits and looking for fat to trim. Kraft Foods, for instance, recently announced it’s conducting a purchasing review that promises to include radical vendor consolidation — Kraft Chief Financial Officer Tim McLevish has said he wants to cut the company’s list of 70,000 vendors in half to obtain better pricing.
Purchasing reviews can be a good move for smaller businesses, too. Savings here are powerful, as they drop right to the bottom line.
“If your overall profit is 10 percent net and you save $10,000 in purchasing,” Porter notes, “it’s like making $100,000 in sales.”
Three of the biggest problem areas in purchasing that Porter’s found are:
- Delegating to the unqualified: If purchasing is decentralized, supervision may be lax, and people with little buying experience end up in charge.
At one company he recently worked with, Porter says, “Department heads were so busy operating the business and keeping the doors open, they pushed that purchasing responsibility down the line, and in many cases you had secretaries, folks making $9 an hour, making significant purchasing decisions.”
- No accountability: Purchasing managers need incentives that motivate them to continuously seek opportunities for cost-cutting. They need regular reviews to check progress. Otherwise, Porter says, a risk-averse climate can develop where buyers are loath to make changes, even if they’d save the company money.
Soon, vendors catch on to the cultural paralysis and don’t feel they have to offer competitive pricing anymore. Buyers get disorganized and begin ordering a few units at a time, when the warehouse could hold a truckload’s worth of pallets.
- Lack of analysis: A thorough analysis of the true cost of purchasing, shipping, and storing an item can often turn up savings. For instance, if you’re shipping items two at a time, what’s that cost in extra freight and added labor at the receiving dock? Compare that with warehouse storage space costs to see whether just-in-ime delivery or buying in bulk is the true money-saver.
A little creativity doesn’t hurt, either. For example, compare shipping quotes and look for money-saving opportunities, such as shippers that have open backhauling capacity they’d sell cheap. Once, when Porter was working for a New Jersey-based importer that needed to ship goods south, he found a backhaul deal with a shipping company that was hauling goods up from South Carolina to the eastern seaboard. Its trucks were then returning, empty, to South Carolina for the next load — so Porter signed up to put his company’s merchandise on the trucks when they headed home.
He says, “I got a freight rate nobody could touch.”