Purchasing Primer: Introduction
By Jacquelyn Lynn
When it comes to buying from wholesalers, even the smartest business owner is playing a new game. The rules are different and the stakes significantly higher. Though purchasing may not have the appeal or excitement of marketing and new product development, it is a critical element of your operation and has a direct impact on your bottom line.
"Correctly done, purchasing--or procurement--will increase your net income," says Beverly Miller, CPM. Miller owns Miller/Bevco, a wholesale distributor of packaging and labeling equipment in Kansas City, Missouri, and is a past president of the National Association of Purchasing Management. "If you give the same effort to buying products or materials that you give to sales, the result will be increased gross profit."
Miller offers this illustration: If your sales total $100,000, but your cost of goods sold totals $90,000, you have made a $10,000 gross profit. But if, for the same sales, your cost of goods sold is only $60,000, your gross profit quadruples.
Your procurement strategy should begin with a thorough analysis of your needs. Take a look at your buying history, and forecast what you expect your needs and future purchasing habits to be. Armed with this information, you can begin your search for vendors. Ask colleagues where they purchase similar items, contact industry associations for referrals, and check local and national industrial directories. If you own a franchise, the franchisor may be able to provide purchasing assistance. Don't limit yourself to local or regional sources; the best vendor may be across the street--or across the country.
After you have located prospective suppliers, begin the evaluation process. One excellent tool is a written request for proposal (RFP) that clearly defines your price parameters. An RFP (also known as a request for quote, RFQ) forces you to document your criteria and address all your needs. It also allows you to make a more accurate comparison of vendors because everyone is responding to the same information.
Formalizing your purchasing process in this manner also strengthens your negotiating position because it lets vendors know you understand and are committed to using professional procurement procedures. This professional, objective approach shows that you make your buying decisions based on a combination of value, performance, quality and cost--not just because you happen to like the vendor's salesperson.
Whether you use a formal RFP to open vendor communications or simply invite a salesperson to call, be as candid as possible about your needs and requirements. "Tell them what they have to know to supply you with what you need," says Miller.
At the same time, don't tell a vendor more than you have to--and certainly don't reveal confidential information that could be damaging to your company if it was either used against you in negotiations or made common knowledge outside your organization. Under some circumstances, it may be necessary to share proprietary information with a vendor to achieve the desired results; when this occurs, insist that confidentiality and nondisclosure agreements be signed prior to the release of any critical data.