- On March 5, 2017
- goods, orders, purchasing, purchasing manager, replenishment, supply chain, supply chain management, trade conditions
What material to buy, what quantity to deliver, what price to negotiate – all these are basic questions from the daily work of one Purchasing Manager. Their solution depends on many more sub-questions and on collecting and processing a huge volume of information. The seller is focused on the products/services from one range. But the Buyer must understand many things, to be always ridding the waves, to seek and find new options, to be a magician in calculations and a prefect negotiator. Thus closing a deal is often a timely process, connected to lots of researches, meetings and negotiations.
The Purchasing Managers have the difficult task to ensure the company with high-quality products at competitive prices in the shortest leadtimes. Apart from that they have to find alternative or new materials which to give big advantage to their company. To close a deal every Purchasing Manager passes through several situations, the exit of which is crucial for the deal. Important for the Purchasing Manager is:
What to buy
Each company has a certain budget to spend. It is Purchasing Manager’s responsibility to allocate this amount in a way that would comply with the direct targets of the firm (meet the current orders), to optimize the internal processes and cash-flow and to offer something new on the market. The costs for new products for the whole following year are usually set in the last quarter of the current year. This budget is rather limited but the company relies the new products to expand the firm’s market share. The Purchasing Manager must find such new products/materials/services which have the needed added value for the company and the customers. Here we don’t talk about the lowest prices, neither about the highest quality, nor about discounts. Here we talk only about the value added to the customer, which may be: comfort, image, peace, new style, solving a problem, competitive advantage, ability for growth and so on. We seek for uniqueness, innovation, effectiveness. It is quite enough the seller to show the unique advantage of his product to the buyer and buyer’s attention is caught.
When purchasing regular products which have already proved their necessity, again the price is not the most important thing in negotiations. Of course we discuss the price and always ask for its reduction. But in case the prices have reached their living minimum, the Purchasing Manager can still find something else that would be of help for his company and thus to buy the desired products and get additional bonus. The added value is the thing that determines what products to be bought and from which suppliers.
Security and stability
There is nothing more stressful for the buyer than to throw good money after bad. And when you spend not your own money but someone else’s money, then the responsibility is bigger. That is why it is important every deal to be supported by a contract. But the contract itself in not interesting. The supplier must have enough capacity to fulfil the orders regularly, to keep the quality level and to work with the buyer’s rhythm. Much before the contract, the Purchasing Manager must be sure that he spends the company money in a way that not only brings benefits for the firm, but it also allows his colleagues to work calm. This is the reason why audits are conducted in the beginning of the negotiations. Not one or two deals have failed because the supplier refuses to accept an audit or because during the audit the buyer has understood that this supplier does not have enough capacity. It is the same reason why samples and demonstrations are required – to convince the buyer that he would receive exactly what he has ordered. The confidence about stability, continuity of deliveries and constant quality have greater share than the price for the potential deal. The stability includes also complying with legislation. Selecting approved and reliable suppliers, the Purchasing Manager aims to avoid future crises, causes by state authorities for example. Another aspect of security is the materials to comply with specifications and the industry standards, so that customers’ security is guaranteed. Unpleasant situations appear when the supplier makes savings and does not meet the specifications requirements. Such initiative is a problem for the buyer because it leads to stoppage of production, returning of goods, sanctions by the controlling bodies. There is no Purchasing Manager who wants to cause such experience and to be guilty for the sales failure. This is why more and more companies prefer to rely on security than on a quick and risky profit.
The list of partners is on third place here to keep the chronology in the process, as the partnership is built for years. Reality shows that this is the first thing that intrigues the Purchasing Manager. There is no stronger unit than the partnership – where both parties (supplier and buyer) work together for the prosperity of their firms and together seek and find solutions. The successful deals are based on trust, not on one-day sales.
The most unpleasant work in purchasing department is the supplier change. From one side because implementing a new supplier takes a lot of time and is related to many problems. On other side, everybody prefers to walk on a ready path and just to collect the fruits of his labor. The supplier change is a result from not-met agreements and interruptions in the buyer’s working process. If one supplier does not keep his word or gives fake promises, he is not welcome neither now, nor in future. So the Purchasing Manager tries to build a network of partners, not of suppliers. He needs loyalty and reliability.
The partnership reflected through the prism of security is flexibility according constantly changing market requirements – here the parties put efforts to meet the current demand and to provoke new demand. The partners rely on each other, collaborate with information and react quickly in order not to lose any ability for growth.
The Purchasing Manager have to diverse the suppliers and avoid any dependency on one or more suppliers. The annual turnover of every supplier could be analyzed by using ABC analysis. If the analysis show that the annual turnover of one supplier is more than 40%, the Purchasing Manager must take measures to reduce or limit the deliveries from this supplier. The reason is that there is a big chance for interruptions in the working process if the supplier stops delivering.
A particular concern is the sole supplier situation. Then the buyer depends on the supplier and adjusts the production according the deliveries.
Avoiding dependencies does not contradict the partnership. The partnership is trust and mutual cooperation, while dependency hinders the buyer to grow, as he is literally oppressed by the supplier.
That is why the Purchasing Manager puts all his efforts to have at least two suppliers for every material or service – from one side this reduces the risk for failure of sales due to stopped deliveries. On other side this reduces the risk for taking the company over or for oppressing the company.
Just after ensuring that all above mentions conditions are met, the Purchasing Manager starts the trade negotiations – price, delivery conditions, payment terms, etc. The good Buyers know that they have to squeeze everything from any deal – so they seek more information, ask the supplier what else could be put on the table. The agreed package at the end usually includes:
- Basic parameters: price, delivery conditions, payment terms
- Aftersales service: guarantees, claims, service, trainings
- Future benefits and avoiding limitations: when the legislation or the task is changes; changes that lead to competitive advantage.
One of the main tasks of the purchasing department is to reduce the blocked resources. This is difficult to be managed if the minimal order quantity is more than the buyer need. For instance, if a firm consumes one tone raw material per month but the supplier insists the minimal order quantity to be five tones, then the buyer has a supply for five months and blocks his operational capital. If another supplier offers the same or similar raw material without limitation in the minimal order quantity, even at higher price, most probably the Purchasing Manager would buy from the second supplier. Overstocking is a significant factor especially with materials whose shelf life is less than a year.
Selling products and services is a challenge, but purchasing them is much bigger challenge. Of course the most interesting part is the negotiation about the trade conditions as they are measurable and show the success, from any deal, in numbers. Thanks to them the company can realize if the best conditions for that particular moment are achieved. But next to these quantity parameters, there are quality parameters which should be agreed much before closing the deal. There are sellers who think that by giving an attractive price they can detrude their competitors from the market. The times of low prices without any guarantees, service and extras, have gone already. Now the Purchasing Managers negotiate packages: product + value added; service + value added and reliable partners as a must.