When people start a business, they go in guns blazing with business plans, market research, networking and advertising. They find vendors, open lines of credit, and start closing jobs. After a few months and some success, all those things seem to get shelved for “more pressing” needs.
Owners wear lots of hats, and the things that drive immediate income take precedence over everything else. When you only spend $30,000 in a year on materials, leaving 10-20% on the table isn’t as painful as when you spend $300,000 or $3,000,000.
Businesses evolve and change over time and their needs change, but purchasing seems to get neglected. As long as product shows up and complaints from the field are minimal, all is well.
But is it? When was the last time an owner, partner, or C-level executive took a hard look at the market (or markets) they are working in to compare vendors?
A hard look
I’m not talking about comparing prices, I’m talking about a total package that benefits the business. How many vendors you work with can directly impact your business by adding cost from complexity.
Look at how involved your people are in order for product to arrive on time. How many calls and emails do they make to order and schedule deliveries? How many vendors in the market are they contacting for every order or project to request bids?
On the other hand, only working with a few key vendors can drive up costs also. Losing focus on the ever-changing offerings in the marketplace delays the conversion to new methods of doing business. It also opens you up to price creep – where vendors raise margins over time without telling you directly.
Focus on purchasing
So where is the healthy balance? Every business is slightly different and has different goals depending on their business model and where they are in the business cycle. Property managers have different priorities than flippers or developers, and each has their own vision. How do you streamline and correct your process to maximize efficiency and reduce cost?
Knowing your business model and aligning the long-term goals with how you buy can drastically impact your bottom line. Make sure you know exactly what the plan is before making major decisions. Selling within 3 years? Maybe the up front cost as opposed to the long-term life is more important for your business right now.
It’s a necessity to get all stakeholders in the operation on the same page with your company approach to purchasing. Too often I see CFO’s issue budgets without any type of long-term goal or direction to the field (and no incentive to do the right thing for the business!) other than “stay under budget”. Businesses need to do some soul-searching to decide where the best balance is.
12 step process
- Analyze your purchasing. Look at what you buy, from who, in what location and for what reason. Make sure you know what goes to cap, MRO, and construction and keep them separate. How does product get where it needs? Are their minimum purchases or delivery fees?
- Look at the product mix by category and see if multiple different items doing the same job get used. Find out why.
- Make a list of all your vendors and their terms, fees, rebates, incentive programs and discounts.
- Poll your operational staff that uses, buys, or interacts in any way with those vendors. Gauge service level, product quality, timely responses and problem resolution.
- Look for crossover or duplication of products being purchased at multiple vendors and find out why. Convenience? Price? Service?
- Look at your employee compensation for anyone responsible for a P&L. Are they being paid based on lowest price, highest discount, or best value? Is there a look back period or allowance for poor selections that don’t meet lifespan or function for that type of product? Are you paying your people to short the business in the long run?
- Create or update your spec book of approved products. Are you using the most efficient and effective product to minimize long-term cost to the organization? Lowest price doesn’t always equate to lowest cost.
- Build a system to track functional life of durable goods and installed services. Make sure products are meeting their average lifespans and that your Cap budget takes that into account.
- Enforce product review of labor and materials subcontractors. Make sure their suitability and workmanship warranty and insurance is sufficient.
- Create incentive programs for employees that own a P&L to encourage choosing the best value. Lowest price and highest discount incentives create a toxic mix impacting long-term ROI. Operations, maintenance, construction and management all need skin in the game.
- Look at your competition and find a way to differentiate your offering, while taking the best ideas and processes and making them yours.
- Negotiate, negotiate, negotiate. Take all your information and put together a program that meets your goals, aligns with your mission statement and core values, and that gives the best ROI for the business.
Change is hard
These steps take time and usually cause some discomfort. This is inherently micromanagement on some level, but it’s temporary. Change is hard, and changing vendor headcount and established relationships is bound to make waves.
The end goal of this process is to find products that meet the needs of the business while lasting long enough for the Cap budget to replace them when they fail , instead of the maintenance budget. Reduced labor, operational costs and risk mitigation also play a role in product choice. Paying 30% more for a product with 50-100% more useful life makes sense for ROI, provided the product performs as advertised.
The same can be said for products that cost more but reduce labor, maintenance, or utility bills.
Change management is the key factor in making this operational shift successful. It takes time, knowledge of market demands, and product knowledge to build a program that will last. Once you establish your base and operational processes are in place, modifying and updating product selections in the future becomes easier.
Build incentives for employees to keep using the process and aligned with the other functional areas of the business. Purchasing impacts every area of your business and on average 15-30% of related expenses are lost to bad process.
Poor selection from lowest price bidding increases maintenance and labor costs, and can lead to premature failure impacting cap budgets sooner than planned. Risk Management, Operations, Purchasing, Maintenance and your vendor partners all need a vested interest in building a successful program.
Make a plan
If you’re operating without a 3, 5 and 10 year plan for your business, you will have problems prioritizing your goals and setting milestones. How do you get the stakeholders on board if you don’t know what the finish line looks like?
The vision of the company, the goals, and the mission statement all need to align, and your purchasing process needs to reflect ownership of those at all levels. Finding a way to make that happen – especially in established companies with tenured employees – will be difficult.
Success enables you to do more with less, making it easier to do more…period. Efficient purchasing pays off in the long run and will positively impact almost every aspect of the business. Dedicating the resources to do it right will pay dividends tenfold for years to come.