“Sourcing mode” is a term that applies to those that are always shopping for a great price, and are always adding new suppliers that have the latest and greatest pricing for the supply or service they are responsible for buying.
Sometimes your team can source or shop an expense category three to four times a year, responding to the latest and greatest offer that a vendor has provided through a catalog, internet offer or some special promotion. Most of us enjoy the “thrill of the deal” and are always on the lookout for the next best bargain. But how effective and how efficient is it to be in sourcing mode all the time?
How sustainable are the results you just achieved?
If you suspect that this is going on within your organization, ask yourself these key questions:
- How long will your organization enjoy those pricing advantages? One month, one year, two years? How many times will we source this category this year?
- How many suppliers will we now have to manage in this category?
- Did we really get the best solution including price, terms, service levels and consulting from this supplier?
Typical purchasing approach
Most organizations have a decentralized purchasing function. Those who have been given the authority to purchase typically focus on price, which is typical and the cost of entry for any supplier trying to get into your organization. A good price opens the door for a larger supplier opportunity, so those on the outside of an organization frequently lead with price.
Well intentioned owners, managers and employees should be commended for finding a competitive price. The thing to look at is did they develop a long term solution, so that you can now put this category to rest and move onto the next opportunities?
Scope of the opportunity – 100+ expense categories
Most dealerships purchase supplies, services and equipment in well over one hundred (100+) expense categories on an annual basis. The scope of this challenge can be overwhelming to a group with or without a formal purchasing function. For smaller dealerships, who don’t have the luxury of paying too much, trying to juggle all of these categories every day, week or annually can be too much to contend with. The typical approach for these smaller dealerships is to shop a couple of high usage items and just hope that the supplier is treating you fairly on everything else.
Strategic purchasing for sustainable results
In order to avoid sourcing expense categories multiple times per year, and with an eye toward achieving results that are sustainable over time, a strategic purchasing approach should be employed.
The six central components of a sustainable, strategic purchasing approach are the following:
- Pricing and terms – Based on your quoting, negotiation or benchmarks, negotiate the best competitive price and business terms for two, three or more years at a fixed rate. If the supplier insists on price increases down the road, allow for a modest price increase in years four and five.
- Supplier base – Having too many suppliers reduces your leverage and adds to your cost. Narrow down the supply base to one primary or preferred supplier with a designated back-up if the category dictates the need for more.
- Payment strategies – Secure early payment discount terms of 2%, 10%, or 30% net or the best possible discount level you can negotiate. When you consider how small your profit margins are, a 2% discount on your purchases can have a very positive impact to your bottom line.
- Process improvements – Every expense category has a process associated with it that can increase or decrease your costs. With credit bureaus, you may be pulling too many. Credit card processing, you may be collecting incomplete information resulting in higher charges. Ask your designated supplier to help you improve processes and reduce your costs. Suppliers are always willing to work with you to reduce costs, especially if those cost reductions are not pricing related.
- Standardization – There are low cost versions of every item you buy (from pencils to sandpaper to janitorial supplies), that can work effectively within your organization. Suppliers hope that your staff will shop from their catalogs and select premium versions of products whenever possible. Work with your team to build a “core list” of low cost supplies in each category. This will help you channel your limited dollars into low cost items that meet your needs. Take away high cost options(internet and hard copy catalogs) and provide lower cost standardized options to reduce costs.
- Compliance (internal and external) – Sustainable cost reductions are challenged when your staff does not use your designated suppliers. Staff must be held accountable and use the designated suppliers to benefit from all of the work that went into the original supplier selection. Of course, supplier price compliance is important to sustainable results as well. Supplier audits will recover real dollars and provide peace of mind to the management team.
Strategic purchasing approach = sustainable cost reduction results
Obtaining a good, competitive price is usually a good starting point with a supplier, but is not a good point at which to end your discussions. Focusing on price only is typically associated with a temporary, short lived solution and can be costly to an organization.
Organizations that employ a strategic sourcing approach will generally be more effective and efficient that those than follow the tactical model. They will typically generate cost reduction results that are sustainable over time, providing a stronger ROI for months and years to come.
A strategic purchasing approach will require a focus on long term pricing, limited suppliers, competitive payment terms, process improvements, standardization and compliance to yield results long term. Encouraging your team to move away from the traditional tactical purchasing approach to the strategic approach will provide a high return on investment and simplify your operational model.
If you are interested in a quoting template that incorporates the strategic purchasing approach outlined in this article, please contact Doug Austin via e-mail at: firstname.lastname@example.org.