Many businesses could improve their profits by making even a small reduction in bought-in costs. So why do so few focus on their purchasing?
Look at any small or medium-sized company and, more likely than not, it will employ no-one dedicated to purchasing. Instead, the CEO or finance director will control all its buying. Hardly strange, perhaps, but a recent survey of 670 companies, by the Chartered Institute of Purchasing and Supply (CIPS) and Andersen Consulting, shows that less than half of the UK's managing and finance directors know what their companies are spending on purchasing and supply chain management, and 29% do not know if their costs are competitive.
Furthermore, the average business spends around 55% of its production costs on purchasing goods and services and this can rise to around 80% in some manufacturing and assembly companies. Yet many of the CEOs, managing directors and finance directors, who take on responsibility for purchasing, lack the specialist knowledge required to protect their businesses from suppliers and salesmen hawking products and services at inflated or unnecessary prices.
'Companies should pay attention but they see the task of buying in goods and services as one they have to do, not a strategic opportunity,' says Peter Williams, chairman of CIPS. As he points out: 'If you want to increase your profit margin, you can appoint a sales or marketing manager and, if they increase sales and revenue by 10%, only a percentage of that reaches the bottom line. If you appoint a purchasing manager and reduce the cost base by 10%, all of that 10% drops to the bottom line.' For an outlay of about £40,000, you can hire a purchasing manager who could save your business double their salary.
Edward Roberts is chief executive of automotive springs manufacturer Peterson Spring UK, which appointed a purchasing manager in May last year.
The company set itself a goal of saving £100,000 in the first year and, says Roberts, it is on target. Its savings are running at approximately 6.2% for the first 12 months and it expects an ongoing saving year-on-year of 6%. He reckons that, in a company with turnover of between £500,000 and £10 million, 'the easiest way to make cost savings is in what you spend' but admits 'most companies don't focus on that'.
David Hewitt, a director of consultancy Procurement Services Limited (PSL), agrees. He argues that the sums add up even for companies with a turnover of under £1 million. 'You only have to make a 2.5% improvement in bought-in costs to double your profit,' he claims, even in a situation where you thought your bought-in costs were under control.
Whether you're talking about raw materials, gas, telephone, market research, marketing gifts or even paper clips, someone is spending your company's money and 'their core competency is generally something else,' adds Williams.
If you don't know who they are, what they are buying or whether they are getting the best price, it's time to take a long, hard look at your company's purchasing processes. The impetus should come from the top. The board should understand how much is being spent on resources as opposed to staff, says Williams. It can then put its weight behind the drive to achieve better value when buying in products and services.
A good way of find out what your costs are is to carry out a purchasing audit. This will help you to see where the areas of expenditure are, for example, how long you have been dealing with any one supplier and whether your company has researched the market in the last five years, explains John Bromfield, managing director of third-party corporate buyer Colomendy.
If you are confident in your company's objectivity, this can be carried out in-house, otherwise stick to the consultants. Most of the big management consultancies have a specialist purchasing operation. Or try smaller firms such as PSL in Hampshire, or London-based Albermarle. These consultants usually have years of purchasing experience, having worked for major blue-chip companies. PSL's Hewitt was regional procurement manager for IBM, and PSL is the product of a management buy-out from IBM four years ago.
Expect to pay around £300-£500 a day plus expenses or, on a fee-based reckoning, between 0.5% and 6% of your purchase costs, depending on the volume involved. The cost of the audit will vary depending on the complexity of your company's structure and its purchasing needs.
Having established key areas for cost reduction, the purchasing professional should be able to do the rest. Bromfield recommends what is known as the 80:20 rule: 80% of your volume of purchases should account for only 20% of value, while the remaining 20% of volume makes up 80% of value. You should concentrate your efforts on this 20% of volume to reduce costs.
A good buyer should be able to identify what is best for your business - whether that means improved stock control, single sourcing, closer supplier relations or partnerships, or increased paperless transactions.
'Buyers bring objectivity, checks and balance,' says Williams. 'They are trained in techniques of supplier strategy and management and negotiation skills. They are always looking to aggregate requirements: who else needs this, what are our needs over the next 12 months and so on? They think about how attractive they can make the package to sell it to the market and get the best possible response back.' Increasingly, particular decisions require the input of several people and, adds Williams, 'a good buyer will be able to manage cross-functional work teams or task forces'.
Potential savings year-on-year will prompt many companies to take the plunge and hire someone full-time. Although £30,000-£40,000 will get you an experienced purchasing manager, it doesn't have to cost that much.
Peterson Spring took on a 26-year-old buyer from a larger organisation.
'He already had a basic knowledge of purchasing and the right negotiation skills but instead of just buying large quantities of one product, for example, we could offer wider experience, a good structure and a "purchasing manager" title,' says Roberts. 'In five years time, when we can no longer pay what he deserves, he can move on. But it's a good way to get a young, bright buyer.'
If you don't want to take this leap of faith, however, there are other options. There's always fixed-contract or part-time, to be converted to full-time if all goes well. You could think about training existing staff through organisations such as the CIPS or the Institute of Directors, either full-time or through selected modules. More recently, third-party providers have also been offering an outsourced facility.
Other companies are forming consortiums to improve their leverage or buying power. This can be advantageous but, warns Bromfield, 'people assume if you have 10 compatriots, you get 10 times the buying power. Wrong.
The worst link tends to set the terms for the nine others. It is hard for people to put their cards on the table and admit what they are paying for their raw materials. People tend not to tell the truth. It depends on the industry and the honesty of those involved.'
Purchasing power of pickle-producer
Fragmented and inefficient purchasing was nearly the downfall of The Wooden Spoon Preserving Company, a Kent-based jam producer looking to expand. The company, founded in 1975, supplied home-made jams and fruits in liqueur primarily to farm shops and independent stores in its local area. But in late 1996, its founder and managing director Peter Bolt, decided to retire and sold 50% of the business to Bennett Opie, a larger producer of fruit and pickle-based products in north Kent.
Bennett Opie was keen to enlarge the scope of the business to take on contracts to supply national retailers but the purchasing structure was unable to support the demands of larger scale production and distribution.
'Allocations, scheduling and booking were unco-ordinated,' explains Neil Dixon, who was taken on as commercial manager to manage the purchasing of raw materials and packaging. 'Control was centred on one person who had to spread his time and energy across a number of areas. There were also cash restraints so speculating and long-term planning were not possible.'
Bennett Opie has restructured the business to integrate the distribution, storage and IT of the two companies. To cut costs and improve reliability, continuity and quality of supply, Dixon and his purchasing team have carried out an evaluation of the company's suppliers and its range of raw materials and an assessment of its inventory control needs. The introduction of an integrated computer system has meant better inventory control, tighter working practices throughout the company and better internal communications.
Just-in-time procedures are minimising stock-holding, and closer relationships with its customers are helping in the planning process.
Wooden Spoon now employs around 50 people, supplying upmarket 'home-made' products to companies such as Fortnum & Mason, Harrods, Waitrose, John Lewis and Habitat. Its sales have doubled from around £600,000 to £1.3 million over the last two years and it has increased its number of product lines from around 130 to 200 in the past 12 months. Dixon is sure that without the greater emphasis on purchasing, the company would never have seen that sort of expansion.