In our last blog, we discussed how procurement techniques may help companies to survive this seemingly-everlasting financial downturn. There are three procurement-related contributions that companies can make that will help to reduce procurement expenditure:
1. Removing unnecessary purchases
2. Reducing quantities and ordering only what is economically viable, and
3. World-class negotiation
Overall, a business fundamental is to remain profitable. Simplistically, this is achieved by ensuring that costs are lower than expenses. Additionally, as the old saying goes, ‘CASH IS KING’ a positive cash flow is essential. Even profitable companies may be brought to their knees by poor cash flow management.
Good procurement management unquestionably helps with cash flow management and profitability; every cent that is saved goes straight to the bottom line; every cent that is saved protects cash flow. Today we discuss removing unnecessary purchases.
There are several principal types of purchase-related expenditure:
a) Raw Materials
b) Bought-out production parts
c) Spare parts (for repairing/maintaining operational equipment)
d) Wear parts (for maintaining operational equipment)
e) Service parts (for servicing operational equipment)
f) Non-production-related operational requirements
g) Administrative purchases (marketing, advertising, travel, security, stationery etc.)
h) HSE needs
i) Service contracts
j) Sustainable capital expenditure
k) Other development and operational capital expenditure
l) Power and other utilities
It will be obvious that some costs are essential and others are flexible depending on financial situations and production needs.
Companies that operate successful warehouses for incoming materials know that inventory is categorised into CRITICAL, ESSENTIAL AND NON-ESSENTIAL materials and is strategically purchased/replenished even in the best of times. This is doubly important in times of hardship. But not all purchases of materials and services relate to inventory replenishment (which we will cover more thoroughly in subsequent blogs) and many purchases and service requests are requisitioned directly to purchasing department.
Each and every purchase for materials and services should be categorised into CRITICAL, ESSENTIAL AND NON-ESSENTIAL. This cannot be accomplished by procurement department alone – it must be a team effort involving end-users, management, finance and procurement. As a result of this teamwork, only those purchases that are agreed by the team will go forward for commitment.
By carefully scrutinising and priority-categorising each and every requisition will firm control be taken of expenditures. This is a huge task but necessary when times are hard. It goes without saying that illicit purchases evading the approved procurement processes are not only undesirable, they may also be manipulative and wasteful, and they are certainly indicative of indiscipline.
Build your team, control your purchases, protect your cash flow and target profitability.
Next blog will discuss management techniques for controlling what you order.