NFIB

Five Ways to Cut Purchasing Costs
02/ 05/ 2003

by Jeffrey Moses

At year-end review, most companies find that only total salaries exceed total annual purchasing costs, making this area a prime target for cutting. It's usually easier to trim the amount paid for purchases than it is to reduce salaries or lay off employees, and each dollar cut from purchasing falls all the way to the bottom line. Today's article lists five ways to cut purchasing costs.

1. Work with your vendors to establish volume discounts.

This may mean that your vendors associate your purchases with other buyers (perhaps even some of your competitors) to offer volume cost reductions. Creative vendors will go the extra mile to secure discounts for you. If your current vendor won’t, call other vendors and see what they can do for you. You may need to go directly to your competitors, proposing a "buying consortium" of sorts to receive volume discounts. Either way, you may have to become more flexible on delivery terms and quantities purchased.

But be careful to buy only when needed. It's good to reduce costs by buying in quantity, but don't tie up capital by buying in bulk to save a few dollars, then watch the items sit on your shelf month after month.

2. Work with vendors to see if they can save money on their own purchases (and pass these savings on to you) by changing their own purchasing habits.

The key word here is "habits." Many vendors become stuck in their own purchasing ruts. Shake them out of this, or find a vendor who may be able to charge significantly less for the same items.

3. Negotiate. Negotiate. Negotiate.

Put every medium or large purchase out to bid, contacting at least three vendors. Make them vie to win your business. In addition, review every relationship that you now have with vendors to see if you can obtain cost reductions. Determine how much of a reduction you need, then call vendors to re-negotiate your present arrangements. You may need to inform them that if they can't give you the price or terms you need, you'll be calling other vendors who can.

4. Try to eliminate the purchase altogether.

It's often amazing to companies that operations continue just as well without the latest computer equipment, without matching desk lamps for all employees, without new carpeting and so on. Before you make a purchase ask yourself, "How does this affect my bottom line?"

Also, many purchases can be eliminated from the manufacturing or selling process. Analyze your actual profit on every product in your inventory. Many times, you'll find that a few of your products are actually producing a negative return. By eliminating these products, you'll also save on marketing and storage costs.

5. Try to convert costly operational processes to save money.

For instance, use a lesser quality paper for marketing materials or newsletters. Convert storage of records from paper to electronic, eliminating not only the purchasing of paper products but the need for storage facilities, warehousing insurance and storage personnel.

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