Purchase Management: What is It & How Can It Help Your Bottom Line?
When it comes to purchase management, the old saying is true: “A penny saved is a penny earned.”
Purchase management, or purchasing management, is all about saving money and increasing profit. As such, it is one of the most important functions in a wholesale distribution or manufacturing business.
In fact, efficient purchase management is arguably the most important opportunity for wholesale companies to earn higher profits, by controlling costs on the items needed to run their business. It is also––along with employee salaries––one of the most expensive aspects of running your business.
It’s no wonder that keeping purchasing costs as low as possible, without losing focus on quality, is such a critical component of a successful business strategy.
Purchase Management: What it Is & Why it Matters
Purchase management is the business discipline that allows companies to control the processes and relationships that make up their purchasing function – the job of which is to source, purchase, and deliver the goods and services that are needed to do business. It can also include purchasing stock that a company resells at a profit.
Accomplishing these objectives requires a strong understanding of the supply chain – from invoice and inventory procedures, to transportation and logistics issues – as well as an understanding of any relevant tax and business laws. Industry knowledge about the goods and services to be purchased is also essential, as well as business acumen to be able to be able to plan, execute, and oversee purchasing strategies that help the company be more profitable.
Controlling costs on the purchasing end allows wholesale distribution companies to be more competitive and offer their products to customers at a more attractive price. It also can help them be more profitable, increasing margins when prices remain stable.
How Purchase Management Impacts Profits
Purchase management is intimately tied to several business outcomes that impact profit. Cash flow, quality, inventory costs, contractual issues and product availability all depend on having a good process for procuring needed stock. It also impacts your overall business and market strategy.
After all, if a company can’t acquire the products it needs at a price that allows them to be competitive and profitable, they likely won’t be in business very long. Excess inventory costs money to store and represents money that could have been better spent elsewhere. Paying too much for the stock needed to manufacture products or to resell can cut into or eliminate profits.
So, managing the process of acquiring the right products, at the right time and for the right price, is very important.
10 Best Practices to Improve Purchase Management
The most basic rule of purchase management is that goods and services must always be purchased and delivered at the best price in order to maximize profits. To do this, companies need to put firm policies and procedures in place.
There are many ways companies can do this, from using a “tender” or “request for proposal” process for big-ticket items and comparing proposals, to using purchase orders or e-procurement for smaller, everyday types of purchases.
A great place to start getting a handle on this area of your business is to consider implementing procurement best practices, such as:
- Developing strategies and procedures for purchasing, and ensure these are communicated to relevant staff. Create a list of suppliers who can provide reliable supplies of high quality items at a good price and desirable terms.
- Developing metrics to measure the performance of your purchase management. These can include cost savings, quality improvement, purchasing improvements such as implementation of EDI, eProcurement or vendor managed inventory, transportation improvements and more.
- Maintaining updated product information and prices. eProcurement can help with this by integrating your company’s purchasing function with online catalogs from your vendors.
- Utilizing competitive purchasing methods such as tenders or RFPs as appropriate, and always comparing price between vendors to ensure your company is getting the best deal.
- Maintaining good relationships with suppliers and keeping preferred vendor lists updated regularly. Negotiate firmly but fairly and make sure suppliers understand your needs with regard to best price, but without alienating them.
- Using a master agreement to ensure that all vendors supply needed stock at the price and terms agreed.
- Placing orders only when stock needs to be replenished (this is called a Just In Time or JIT strategy) and keep stocks at optimum levels. Do not maintain excess stock.
- Centralizing purchasing activities whenever possible. Ensure all staff are trained and incentivized to follow purchasing procedures, such as obtaining a Purchase Order number prior to placing orders.
- Integrating systems and processes. Purchasing systems should be fully integrated with inventory and accounting to enhance and gain insight into profitability.
- Investing in technology to accommodate advances such as eProcurement and mobile devices into your workflows. Eliminate paper processes wherever possible and take advantage of integration between purchasing, inventory and ERP software to gain insight into profit and performance.
Effective purchase management is much more than creating a wish list of needed items and buying them. To get the best price, companies must look at every aspect of the purchasing process.
Got questions about purchase management and how to drive more profit to your bottom line? Let us know about it in the comments!