3 Ways to Effectively Control Purchasing Costs

5 steps to an effective purchasing budget

5 steps to an effective purchasing budget

Optimize your purchasing department

Transforming the purchasing sector with planning

In an agile world like the one we live in, in which the dynamics and paradigms of supply chains change rapidly, digital transformation in any sector, including the purchasing sector, is unavoidable.

But for this transformation to be successful and expand the competitiveness and profitable potential of a business, we need to ask ourselves: how to promote this structural change in a sector that normally has traditional methods and needs to invest in updating and qualifying its employees?

Elaborating a good purchase planning that ensures greater predictability of demands, greater agility and better negotiation conditions – especially when opting for an annual contract with suppliers, which keeps the value of the parts quotations unchanged during the contracted period.

 

Benefits of purchasing planning

Planning in the purchasing sector is fundamental for the financial and cash flow health of an organization. It ensures that production will never stop due to lack of parts and that, when necessary, there will always be parts in stock. In addition, it avoids scrapping of parts, waste, unnecessary expenses – such as air freight in the case of last-minute purchases – and no lack of cash for any fundamental purchase.

Proper planning is capable of offering the procurement sector greater visibility of purchases, which can provide many benefits. Some of them are:

  • Avoiding extra expenses, which blows the department’s budget;
  • Greater efficiency: it avoids rework, forgetting materials to be purchased and prevents the same material from being quoted by more than one employee;
  • Allowing the consolidation of orders, which makes negotiating the prices and deadlines for payment and shipment easier, and generates savings;
  • Avoiding delays in the arrival of materials;
  • Evaluating the need for technical knowledge to support the acquisition process. Especially when the internal technical capacity of the purchasing department is not available or is insufficient;
  • Monitoring the purchasing process to analyze actual performance regarding planned activities and thus promoting adjustments – continuously and agilely;
  • Allowing the purchasing department to meet additional needs with more quality and speed that were not foreseen in the initial planning;
  • Increasing the transparency and predictability of the purchasing process.

 

The role of supplier choice in procurement planning

Procurement planning will only be effective if it includes the supplier qualification stage, which can avoid several inconveniences related to contracts closed with inadequate companies.

And problems with suppliers happen more often than you might think. A virtual community dedicated to purchasing professionals, Sales Hacker, has evaluated the relationship with its suppliers. Among the results obtained, we highlight two very worrying data:

  • 84% of professional buyers reported that they always or often do not receive feedback from suppliers regarding their inquiries to purchase various materials;
  • In relation to after-sales, 76% admit that the lack of return always or frequently occurs when they ask for information from the seller about any aspect of the purchased product – and many times already paid.

Many times, the discovery of a bad service, whether in quality, price, punctuality, ethics or transparency, only happens after being hired. That’s why it’s so important to research the supplier’s reputation before closing the contract, use advanced negotiation techniques and create performance indicators to analyze the services offered.

An even more practical option is to count on the services of companies specialized in the acquisition of materials, which can offer many advantages to the organization.

 

Annual purchase contract: is it worth it?

The option of an annual purchase contract with a specific supplier helps to plan most of next year’s purchases and close their values, ensuring that everything is within budget. Also, this modality optimizes the purchaser’s routine, since the same quotations made when the contract was closed don’t need to be repeated when the part becomes necessary. Having an annual contract is our golden tip to strategically plan your department’s purchases, from short, medium and even long term.

Soluparts is a spare parts specialist that offers an annual contract. In order to close said contract, it’s necessary to make a survey of the acquisitions made in the previous period, as well as meetings with all sectors of the company to understand the individual demand of each one of them in the next year.

With this list of indirect materials, sent by the client, Soluparts’ team quotes each one of the items, consolidating them in a single document – which is used for contract elaboration. This way, during the current year, when there is demand for any of the listed parts, there is no need to send a new quotation request – just send the purchase order, which greatly benefits the process of purchasing parts as it becomes more agile.

In Soluparts’ Annual Contract, the price of parts remains unchanged for one year. Thus, the buyer becomes a contract manager, and gains time to handle other strategic tasks.

 

If you still have any questions about how it works and what are the benefits of the Annual Contract, we have prepared an infographic to help you, click here to download.

To understand how to start drafting an annual contract for your company, talk to our spare parts specialists.

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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.

Conclusion

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.

We also do spot sales: request a quote with us today.