Thursday 21 June 2012

Reducing your costs isn’t just about negotiating lower prices!

If I ask business owners and managers about their purchasing they normally reply by proudly telling me that they always get 3 quotes and then negotiate down to the lowest price. This process is likely to have involved some banging of fists on desks and exclamations of “HOW MUCH?” & “Lower Lower.”

Perhaps a little stereotypical but that’s certainly what most people think procurement/purchasing/buying is all about. Yet if it’s the only thing you do then I can assure you “your total costs could be lower.”

Why - because negotiating the price only takes place about 90% of the way into the buying process! It’s the 90% before the negotiation takes place where you will have been adding cost into the provision of the goods or services. It’s no use thinking you’ve done a good job in negotiating a 5% reduction when the real costs savings could be 30% if you’d only taken the time to fully and rigorously apply best purchasing practice to the item or service.

The 30% cost reduction might come from:

• Revisiting the specification – is it over specified, can it be standardised or redesigned
• Understanding and consolidating or even reducing your volumes
• Better forecasting
• Reducing your supplier base
• Process reengineering – taking wasted time and material out
• Reducing stock holding
• Moving to more efficient suppliers
• Finding more financially secure suppliers
• Understanding the needs of your suppliers
• Understanding the cost breakdown for the item – materials, overheads, profit etc
• Negotiating with others within the supply chain
• Improved payment terms
• Improving delivery times
• Reducing quality issues
• Improving customer service – theirs and yours

And that’s just a list for illustration purposes.

Next time you ask for 3 quotes I’d suggest you check you’ve done the work before hand to ensure that what you’re asking for, and from whom, has been adequately investigated. Otherwise you might as well be pouring your cash down the drain!

Alison Smith
The Purchasing Coach
Sowing the seeds for cost reduction in your business
+44 (0)7770 538159

Money down drain picture source: via Alison on Pinterest

No comments:

Post a Comment