7 tips to not exceed the purchasing area budget
In the corporate environment, budget planning is intrinsically linked to the maintenance and growth of a company.
In the purchasing department, particularly, the collection for reduction and control of expenses, on the part of the management is enormous. The profitability of the whole company depends on the good management of the department and the activities directly linked to it, such as logistics and maintenance. Thus, the purchasing professionals stop acting only in the acquisition process and start to participate actively in the budget discussion.
In this article, we will discuss the importance of budgeting for the purchasing area. Also, we will bring some tips on how to stay in line with it and even reduce costs (a great challenge, facing the complex, volatile, dynamic and competitive reality of a company).
Why is the purchasing budget important?
The experts who discuss the subject point out some factors related to the relevance of a budget for purchases:
- It informs the purchasing strategy, making clear what is possible or not to buy, according to the established budget;
- It helps to measure spending, signaling when there are problems with finances, if there is a spending beyond the forecast that can hinder the acquisition process, or if there are parts being purchased with the value above the market average;
- It ensures transparency between the areas of the company, and the purchasing department can be responsible for their finances;
- It assists in a more effective management of the acquisition finances, since a budget will allow the appropriate allocation of resources for purchasing projects;
- It provides insights for decision making. Purchasing budget information (spending trends) can help you make better choices.
- Because of the advantages described above, budgeting for the procurement area is essential for reducing short, medium and long term expenses.
Tips to stay within your purchasing budget
In order to obtain success in the elaboration and monitoring of information regarding the purchasing budget, there are several guidelines that can be followed:
1. Identify the products that need to be purchased
Define which parts should be purchased, how much, when they will need to be used and how much you are willing to pay. Search supplier options and consider those that have a good reputation, good prices, customer service and better response time. Finally, close the deal with the supplier that offers the best conditions.
This process can become tiring, as it involves negotiation steps, but it is extremely necessary!
Stock management, which extends to other branches or other plants, is also very important to maintain the budget of the area. Before buying a part whose use is low, it is worth to verify if it is in stock in other branches and, if so, request the part to the branch that needs it.
When this stock check is not done in the correct way, there is the risk that parts are scrapped – and this is the main cause of unnecessary expenses and waste.
It is worth remembering that low turnover indirect materials stored in fixed assets deposits decrease the working capital and can lead to the loss of good purchase opportunities due to lack of available capital.
2. Get approval from other stakeholders
Promote budget credibility and legitimacy by involving other strategic areas (such as accounting and finance), which may suggest savings.
Some companies have the annual budget defined by the financial board and, during the month, a meeting is held with the entire purchasing department and the board to follow up on expenses. Similarly, other internal department meetings are needed to study spending reduction strategies – these periodic budget-focused meetings are important to keep expenses under control!
3. Plan your expenses in advance
The person responsible for the purchasing area needs to know the amount available to purchase a specific item, and they should clarify to the suppliers how much they are willing to pay for a certain product.
Planning here is also essential to understand what the negotiated condition for delivery should be. A purchase made a few months in advance allows the low price to be prioritized over lead time, for example.
A last-minute purchase, even if it is very necessary for the production, ends up having a higher price – not to mention the price of urgent freight, which ends up being more expensive.
A well-planned budget allows load consolidation, which decreases the price of material shipment. This is because a unique shipment is made of all the parts – but, for this it is important to have a partner that supplies several brands and that is able to keep the products in a warehouse for a unique shipment, something that Soluparts offers.
4. Have a margin to make your budget more flexible
This margin will help adjust the purchasing area’s budget when faced with uncertainties and risks such as those related to projects, acquisitions and deliveries. It is important to keep stakeholders aware of these changes, so that they understand the real situation and how much of this margin has already been used. This caution is fundamental in times of economic crisis like the one we are living at the moment.
5. Document and monitor the terms with your suppliers
This step is essential to assist in the control of the agreements signed, which consequently keeps the budget updated.
Among the essential points it should be clear what the supplier should offer (and what the price, payment conditions and delivery terms are), conditions in case of breach of contract and the guarantee of confidentiality – check out the full article on the benefits of contract management in purchasing.
6. Use technology to your advantage
Use software that updates spending in real time and helps track orders and approvals. This way, the information will be more organized and the professionals will be able to focus on less operational activities and perform a more analytical work, seeking to optimize processes, reduce expenses and, consequently, increase the company’s profit. See our article about the 10 softwares for the purchasing department for tips.
Some purchasing department software issues automatic purchase orders for parts that are purchased regularly – for example every three months – based on the last price offered by the supplier. It is necessary to follow these orders closely so that it is possible to renegotiate the prices, which tend to increase depending on the contract.
It is ideal to try to understand why the possible increase happened and in what way it will impact on the expenses – this readjustment can be due to tariffs, for instance.
Keep quotations and contacts of other suppliers that have this same piece to contact them in case the price increases to the point of it not being feasible to purchase with the same company. As we can see, renegotiation and contract control are very important and need to be monitored.
In addition, create in your Business Intelligence software, a unique dashboard to analyze metrics related to expense reduction and budget control.
7. Have a team that understands budget
Large companies offer their purchasing professionals training on cash flow, financial management and budgeting to qualify them to make important decisions to control spending.
Knowing the operation of the supply chain and having logistics knowledge is fundamental. Also try to understand the productivity and profit cycle generated by each part purchased. This will help you define the priority and urgency of a specific purchase and the ideal Incoterms and payment conditions for it. For example, if the valve you purchased needs to produce for X months to generate Y of profit in 180 days, and this amount pay the valve, you can negotiate the payment for 180 days after shipping it.
In this article, we discuss the importance of closely controlling the purchasing area budget. The growth of a company, in today’s world, is complex and brings several challenges, which makes budget planning an important part of its success and profitability.
It is important to have a frequent dialogue between the purchasing team and the financial department in order to have an alignment among all. In addition, it is necessary to maintain flexibility, control and transparency over the decisions made.
The effectiveness of strategies to reduce spending in organizations makes them more competitive, by enabling investments in their growth and in people, for example:
- Renewal of machinery;
- Training of employees;
- Improvement and expansion of the physical structure.
To make purchases with good prices, a great option is to count on a company like Soluparts. Our team of experts in indirect material procurement always gets the best commercial proposals for your company.
We also offer an Annual Contract: from your subscription, the prices quoted for each piece remain unchanged for a period of one year, which assures more freedom to make purchases in the period you prefer.
This helps you to map and plan the approximate costs of spare parts for the next year, allowing better control of your budget. Try these benefits and keep your budget under control: Learn more about our Annual Contract.