How to Keep Your Purchasing Costs Down
Keep control of your costs by purchasing regularly and getting to know your suppliers
The process of purchasing from suppliers will be a huge part of almost any business – representing one of your most significant costs.
Any reduction in purchasing costs can have an extremely positive knock-on effect on other areas of your business – developing a lean, smart approach will almost certainly be more effective than focusing on profits.
This article looks at how you can develop an effective purchasing strategy. We cover how to use a product specification to work out exactly what you need, how to choose, negotiate and build relationships with suppliers, how to keep stock costs down, and more.
What should be my overall approach to purchasing?
To ensure you purchase smartly, you need to put a number of things at the core of your business’ activity. In particular, it is essential you integrate your purchases into your business plan. Purchasing from suppliers should never be an afterthought – work out a clear purchasing strategy and make it one of the core elements of your business plan.
Indeed, you should constantly be on the lookout for better suppliers and upcoming price fluctuations. Keeping a close eye on costs and planning well in advance for large purchases will also help avoid committing yourself to inflexible long-term contracts. (Read more on cost control here.) By identifying and prioritising your essential purchases and expenditures, which will include the supplies needed to sell your product or service, you will be able to work out how you can drive costs down.
Furthermore, by consolidating your purchases, you can cut down on the number of suppliers you work with. Long-term or bulk deals with major suppliers will save you money compared to using a multitude of smaller suppliers. Similarly, you can foster relationships with suppliers. See ‘supplier relations’ for more on this. Finally, review your purchasing on a regular basis.
How do I draft a product specification?
Before you begin the purchasing process, you need to have a clear idea of what it is you want. A well-drafted product specification, or ‘spec’, will show suppliers exactly what you need, in addition to helping you understand what is most important to you. It may sound obvious but always ensure you ask the end user for feedback. If you are buying equipment such as IT for employees, ask them what they feel would improve their performance most. If you are purchasing to create a product for customers, ask them about their experience of your existing offering, or go through customer feedback records.
Secondly, list the features of the product and supplier in order of their importance. Examine factors like quality, technical specification, delivery times, cost, ease of use, supplier reputation and compatibility with existing products. In many instances, you may need to consider whether you will need technical support or training. For IT equipment or specialist products like payroll software, this may well be the case.
Finally, work out the likely costs across the entire lifecycle of the product. If you are purchasing laptops from a supplier, for example, the total cost of the product will be much more than the purchase price – you should factor in the cost of maintenance, repairs and warranty renewals.
How do I find suppliers?
Firstly, compile a list of suitable suppliers. Ask your friends and business peers who they use, and perform a web search to amass a preliminary list of names. You could also attend trade fairs and exhibitions.
Secondly, send suppliers your spec and ask for quotes. Suppliers should have a detailed description of exactly what it is you need. Get them to quote a guaranteed price, and ask them about the availability of discounts for bulk deals or repeat business.
Finally, rank the suppliers according to criteria you set. When you drafted your product specification (above) you should have already listed the factors that matter most to you. Using these, examine each supplier in turn and rank them, using a numbered scoring system. If price is important to you, for example, give suppliers marks out of 10; if delivery speed is less important, give them marks out of five. Add the scores together.
How do I negotiate a purchase?
This is perhaps the trickiest aspect of purchasing. Fail to do your homework and prepare properly and you could be stuck with a disadvantageous deal. The below is only an overview – for an in-depth look at negotiating a purchase, click here.
Make sure you plan ahead of time. You should have a clear idea of your objectives for the negotiation and what you are prepared to give ground on. Anticipate the approach that the supplier will take themselves and analyse their strengths and weaknesses, as well as your own.
Once you get to negotiation stage, aim to be in control. Limit the discussion to priority issues you have agreed upon beforehand. Do not be swayed by threats of impending deadlines and other scare tactics.
When something has been agreed in negotiation, write it down, and get the supplier to confirm that it provides a true record of what has been agreed. Read all contractual terms carefully, and make sure you have a way out of a long-term commitment (such as a break clause in a lease).
Finally, agree contingencies. Work out what would happen in all the scenarios in which something could go wrong. If part of a shipment of goods arrives damaged, for example, how long will it take to replace them?
How do I keep stock costs down?
If you are a business that buys in stock on a regular basis, it will normally represent one of your biggest costs, so it is even more important that you purchase smartly.
If you are a larger business, you don’t want to have to centrally authorise every purchase. Delegate purchasing by assigning responsibility for purchases to specific individuals, and set budget limits for each department – this way, you save on administration whilst keeping on top of costs. Furthermore, plan ahead of time by looking at when demand is highest for certain products, and use this to forecast your buying. Integrate a reporting system so your business is notified in plenty of time if stock is running out.
Although ordering a huge supply of stock at once might be facially cost-effective, you need to balance this against the cost of storing it until it is sold. Sometimes, suppliers will be able to hold stock for you until you physically need it – investigate this possibility and keep storage costs down.
Obviously, it is important to draft a clear delivery policy. Assign responsibility for someone to check over goods before they are signed off, and make sure all the relevant people are notified when you receive delivery of goods.
Finally, use the internet. Group buying sites and auction sites can often deliver much lower prices on goods than buying from a named supplier, although you have less control over selection and quantity.
How do I foster good relations with suppliers?
Creating a good relationship with suppliers is crucial – simple goodwill can very often deliver you better deals than any amount of hard-nosed negotiation.
Indeed, treating suppliers well with an open, friendly, professional and honest approach will almost certainly be reciprocated. For key suppliers, you should go the extra mile – see if you can co-operate to improve efficiency across the entire supply chain, and keep them up to speed by inviting them to key meetings. However, prioritise key suppliers. You don’t have unlimited time, so focus your charm offensive on the few suppliers that are crucial to your business’ success. See if you can obtain bulk discounts from them, or deals that reward repeat business.
At the same time, don’t put all your eggs in one basket. Whilst you should focus your efforts on a few suppliers, be careful to avoid over-reliance on just one. Think about what would happen if one of your key suppliers went out of business – would it put your own process in serious jeopardy? If so, work out a Plan B.
How should I review my purchasing?
Regular reviews are essential to keep costs from spiralling out of control.
A good idea would be to assess supplier performance using a ranking system. Use numerical scores to rank them on factors such as: delivery time, quality of goods, communication and price and use accounting software to keep on top of purchasing costs. (Click here for more on using accounting software.)
Finally, prioritise areas for improvement. Work on the most pressing concerns first.