All organizations have a purchasing function within their operations. Some organizations centralize their purchasing activities with one group to leverage spend, reduce costs and drive economies of scale. Other organizations decentralize their purchasing responsibilities and spread that responsibility to management closest to their operational responsibilities to maximize the category expertise.
Whether your operation is centralized or decentralized, the most effective purchasing functions share common best practices that provide numerous benefits to the parent organization.
The Eight Best Practices of Highly Effective Purchasing Operations
- Visibility of Indirect Spend – Visibility of all indirect spend is a sign of a high functioning purchasing function. Any spend that is directed to outside suppliers with few exceptions (legal and accounting) should be visible on an annual basis. Spend should be known by category and by supplier to maximize effectiveness of planning.
- Broad Purchasing Scope – The purchasing scope should be broad, spread across an organization and have an influence (not control) on all spend. Purchasing can provide the spend, help develop the strategies, source the solutions, quote, analyze, implement, measure and audit the specifics of each category…..all of which is a good description of spend management. Department heads can and should make the ultimate call on supplier selections, but the Purchasing function manages the schedule and utilizes discipline to ensure consistent results in each category.
- Sourcing Plan – All indirect expense categories should be planned and sourced on a planned basis. Most categories can be sourced with pricing and terms locked in every 24 – 36 months. Some categories by their very nature should be sourced more often, but those are the few exceptions.
- Sourcing Strategies Developed – Effective organizations determine the sourcing strategy before any sourcing, quoting or negotiations begin. Strategies to consider include sole sourcing, multiple sources, partnerships, joint ventures and will maximize effectiveness and reduce risk within the category.
- Narrow, High Performing Supplier Base – Highly effective purchasing functions have just enough suppliers to meet the strategy for that category. If they have decided to “sole source” office supplies to maximize leverage and improve controls, then one high performing supplier should suffice. Excess suppliers waste leverage, waste time and add cost to an organization.
- Category Expertise – An intimate and thorough knowledge of the spend categories (competitors, pricing, quality, service) is important to generate a solution that generates both short term and long term benefits. For those executing the sourcing plan, sourcing expertise utilized with consistent processes are also required to develop sustainable solutions
- Performance Metrics – Successful organizations and departments have articulated their business objectives and developed related performance metrics. The purchasing function should be no exception. Spend or purchasing metrics that address total spend controlled, categories sourced, savings generated, audits, etc. should be in place and utilized monthly.
- Consistent Sourcing Process – Sourcing is a repeatable process that is used with each and every expense category. Developing requirements, an objective, a strategy, sourcing suppliers, developing a quote, negotiation, analysis, implementation, measurement and audits of suppliers should be a consistent process used for every category for maximum results.
Scope Issues can sub-optimize results
Some larger organizations including dealer groups, have high functioning purchasing organizations in place, but still don’t generate compelling results. Often times the problem is that their scope of influence within the organization is much too small, focused on the obvious expense categories but fearing to tread into those with the largest impact.
Mapping all organizational spend, with annual spend volumes can be a great resource in determining responsibility, scope, timing and strategy and can frequently resolve the scope issues.
Final Thoughts
Cost containment and cash flow optimization will probably take on greater importance in the months ahead. Suppliers are finally raising prices to deal with their own higher costs and more regulations and mandates are coming that will increase the cost of doing business and reduce already thin margins.
Organizations that employ the purchasing and spend management strategies listed above will be well positioned to ward off price increases and instead make steady, methodical progress to controlling expenses and generating newly created cost savings.
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