There can be no guarantee of profit after delivering a physical product without careful attention to the steps of profitable purchasing. To be assured of purchasing the highest quality at the best possible price, you must take a focused approach to the way you acquire raw materials and supplies.
In this post we will explore four ways to improve your purchasing discipline and drive more profit from your business.
What is a Purchasing System?
A purchasing system is a process for buying products and services including all the steps from discovery to selection, requisition and purchase order through to product receipt and payment.
Purchasing systems are a key part of effective inventory management because they help businesses to monitor existing stock and help determine what to buy, how much to buy and when to buy it.
Why is a Purchasing System important?
Basically, if a business owner can reduce the volume of raw materials used (e.g. by using less materials in each product) or lower the cost of their supplies (e.g. through substitution or negotiation), they can generate more profit. Most business owners do ad-hoc purchasing so there is a lot of opportunity to improve the result by implementing a repeatable system, and make more money.
Four Steps to a Profitable Purchasing System
Here are the four steps you can run through to investigate whether there are any improvements to be made to your purchasing process, and the explore ways to improve your purchasing discipline:
Step 1: Review process to determine specific specs
Put every item you purchase through a review process to determine exactly what you need to produce the final product for the customer. Write out the specific use of each raw material or supply.
Use this process to determine the form it should be purchased in (bulk, prepared, portioned). The more you know about exactly how the product will be used, the better buyer you will become. A detailed spec will also help improve communication with your vendors.
The idea in short: Buy your inputs in the correct form to suit your purposes.
Step 2: Reassess the required quality of raw materials and supplies
Determine the level of quality needed for each item you use. Buying only the highest quality sounds like the right approach (generally speaking it is) but often, because of the way it will be used, the highest quality is a waste of money.
For example, you do not need Grade A potatoes to make wedges but they would be very appropriate for boiled potatoes to serve with an expensive steak. Buy broken tomatoes for the spaghetti sauce rather than breaking up whole tomatoes.
The idea in short: Don’t pay for higher quality than you really need.
Step 3: Implement a bid system
You must determine your standards regarding price, quality and service but no matter how they rank for your particular needs, it is important to solicit bids from various vendors. Regular bids will help you achieve the best service, the highest required quality and the most favorable price.
Some raw materials and supplies need to be bid weekly (e.g. perishables) and others can be shopped less frequently, perhaps monthly, quarterly or annually (e.g. durables). Have a consistent bid system and data collection process in place and gather price information frequently.
The idea in short: Shop around to find a better price.
Step 4: Calculate and manage for par stocks
Only buy what you need to last between deliveries, a task made easier by establishing par stock levels. When a par is followed, items are in stock for a minimum time so the quality does not have a chance to deteriorate. Lower quantities on hand mean less chance for wastage.
Par stocks assure that you only purchase the amount of each item that you will need for production, freeing up cash that would otherwise be tied up in inventory. Determine par levels by reviewing your recipes and projecting the sales level and product mix between deliveries.
The idea in short: Measure and manage to suit your needs.
Purchasing builds inventories, and inventories eat up working capital. Having a purchasing system in place and refining it over time can drive higher profit margins and it can be as simple as reviewing your current systems and processes, and making simple improvements.
Before you go...
We all know that small business is about doing the little things right.
The little optimisations, the high-impact tweaks and the 1% gains you can make to your business to make it a little better, a little more profitable and even a little bit more pleasant to run.
I have interviewed 500+ business owners, surveyed thousands more, and I am always probing for their best tips, tricks and hacks to improve their business. There are three that stand out above the rest and I want to share them with you.
Join my email list for free and I’ll send them to you right now.