Essential guide to purchasing

Effective purchasing helps you control costs and can significantly improve margins and profits. Your purchasing choices also have an impact on the quality of your own products or services and on your cash flow.

Successful purchasing relies on knowing what your objectives are and specify exactly what you need from your purchasing. You also need to work at choosing the right suppliers and building working relationships with them.

A co-ordinated approach

Drafting the spec

Finding suppliers

Negotiating a purchase

Managing stock

Supplier relations

Reviewing performance

1. A co-ordinated approach

Build purchasing into your business planning

• Link purchasing plans with business goals. For example, if you aim to sell a premium product, you may need to pay more for high quality components.
• Involve buyers in budgeting and cash flow management.
• Involve buyers in new product development and production planning.
• Use buyers' knowledge to identify new and improved products and suppliers. Buyers can often give you early warning of price fluctuations or technology changes.

Be aware of your top priority purchases

• For example, insurance may be essential to ensure survival in the event of a disaster.
• Identify which items you buy regularly and spend most on. Negotiate favourable prices for these.

Consolidate your purchasing

• Many businesses end up paying too much because small orders are placed with many different suppliers.
• Reduce the number of suppliers you work with and get discounts for larger orders with key suppliers.
• Gather information from your different purchasing departments. Check there is a consistent approach to price and quality.
• Form strategic buying alliances, by getting together with other businesses and pooling your resources.

Manage your costs

• Plan in advance for major purchases.
• Avoid fixed costs, except when you are sure they will work to your advantage. For example, think carefully before committing yourself to long-term fixed rate financing or fixed price contracts.
• Consider purchasing alternatives, such as leasing. When considering finance deals, discuss the tax implications with your accountant.
• If you are a manufacturer, consider using standard components, to reduce design and manufacturing costs.
• Consider using a purchasing consultant to analyse and reduce your spending.

Make purchasing relationships work for you

• Avoid over-dependence on one supplier. Have a contingency supplier in reserve.
• Get the benefits of good supplier relations with key suppliers.
• Consider using specialist agents such as an insurance broker or a recruitment agency.

Assess and improve your purchasing

• Regularly reviewing performance is essential.

2. Drafting the spec

Ask for help to define exactly what you need

• Get your employees to suggest cost-saving opportunities. Provide incentives for doing so.
• Use customer feedback records to tell you what is good and what needs improving.
• Ask your suppliers to suggest improved products and services.

List the important features of the item you are buying

• For example, size, quality, appearance, technical features or delivery schedules.
• Think about what you want your purchase to do and how well it should do it.
• List critical factors in order of importance. Never buy on price alone.

Do not over-specify

• Unnecessary or unreasonable specifications are counterproductive.
• Costs will be increased and suppliers will be irritated.

Other factors may rule suppliers or individual products in or out

• Compatibility with existing systems may be a deciding factor.
• For long-term supplies, choose a reliable supplier that is unlikely to go out of business.
• A guarantee is only significant if the supplier will honour it.
• Technical skills or training may be needed. You may have to take on specialist staff.

Good technical support may be essential

• Assume everything that can go wrong will. You need to know how quickly help will arrive and how much it will cost.
• Find out if spare parts will be available and how experienced the support staff will be.

For major purchases, put together realistic lifecycle costings

• For example, when buying computers, the main costs lie in running and learning how to use the system.
• Other lifetime costs include installation, consumables and maintenance.
• Think about how quickly equipment might become obsolete, and what expansion or upgrade options are available.

3. Finding suppliers

Get recommendations from friends and business contacts you trust

• Ask your local business support organisation for a list of suppliers in your area, or contact your trade association.
• Ask employees and existing suppliers.
• Meet potential suppliers at exhibitions.
• Search online and use business directory websites.

Make up a shortlist and contact each supplier for quotes

• Send each supplier a standard checklist covering all your requirements.
• Ask suppliers to send you product details, price lists and other relevant information.
• You can often obtain better terms by letting suppliers know that they are competing for your order.

Compare suppliers in terms of the factors that matter most to you

These may include:

• Product suitability and reliability.
• Speed and frequency of delivery.
• Quality and flexibility of service. Check whether the supplier has quality assurance systems. If appropriate, ask for a copy of the certificate of ISO 9001 accreditation.
• Price range and order size.
• Location and ease of communication.
• Reputation. Ask for evidence of similar work and follow up references.
• Financial position.

For important contracts, visit suppliers that seem to meet your requirements

To assess how they are likely to perform, ask yourself:

• Are they professional?
• Do they have sufficient work?
• How eager are they for your business?
• Do they have the necessary equipment and space to cope with your order?
• Do they appear to be financially stable?

4. Negotiating a purchase

Plan ahead for the negotiations

• Set out your objectives and what is negotiable.
• Analyse the strengths and weaknesses of both sides' negotiating positions.
• Anticipate the supplier's negotiating tactics and prepare your response.
• Aim for a deal that works for you and keeps the seller happy. Do not squeeze suppliers too hard if you are planning to buy from them in the future.

Get agreement on your priority issues

• For example, availability, quality and payment terms.
• Get suppliers to quote a guaranteed price and state how long it will be valid.
• Agree payment terms. The maximum payment period is 60 days from the date of invoice, or 30 days if no payment period has been agreed. Ask for a discount for early payment.
• Avoid payments in advance, especially if you are unsure about a supplier’s creditworthiness.

Anticipate what will happen if problems arise

• For example, if a delivery includes faulty goods, will the replacement be delivered immediately or will you get a credit note? When will you pay for the order?
• Agree delivery performance standards as a condition of your contract.
• Set penalties for contract infringements, such as missing critical delivery dates.

Agree everything in writing

• The specification and the terms you agree will form the basis of the purchase contract.
• Relationships often break down because of misunderstandings. Having a written contract avoids this.
• Unless you propose your own terms, you may be agreeing to the supplier's terms.
• Beware of long maintenance contracts. Read the small print and ask the supplier to spell out your future commitments.
• All the specific terms agreed should be included in a written contract. Verbal agreements are binding in law, but are difficult to prove.
• For important contracts, consider getting legal advice.

5. Managing stock

Plan your stock levels

• Aim to minimise the amount of cash you have tied up in stock without taking unnecessary risks. Assess how serious the impact will be if you run out of stock.
• Balance the advantages of discounted bulk orders with the benefits and risks of just-in-time ordering.
• Take into account how much storage space you have. Investigate the possibility of getting your supplier to hold stock for you.

Order at the right time

• Monitor your stock turnover. Identify seasonal peaks and prepare forecasts.
• Assess your supplier's delivery performance. How reliable is it and how long do deliveries take once an order has been placed?
• Plan when to re-order regular supplies. A weekly stock check and reordering system may be sufficient.
• Avoid surprises. Develop a clear reporting system, so you know what is needed and when, from your employees.

Introduce systematic ordering

• Set budget limits and make it clear who can authorise purchases.
• To reduce administration, give individual managers purchasing limits, rather than centralising all purchasing.
• Copy ordering information to the person placing the order, accounts people and goods inwards staff, as well as suppliers.
• Get suppliers and employees to fit in with your ordering systems and quote your order reference codes.
• Put one person in charge of petty cash, to cover small, one-off items.

Avoid problems on delivery

• Make sure delivery terms are clearly agreed from the outset. Ensure your supplier understands the time constraints that affect your business.
• Set up a reminder system for late goods. Chase them up immediately.
• Note when goods arrive and store them in a known place.
• Make sure delivery notes are not signed until deliveries have been checked. If you must sign, note any reservations (eg 'goods not checked') and tell the seller.
• Make sure all relevant people are told when goods arrive.
• Ask for money off for minor faults at goods inwards inspections. Discuss recurring quality problems with the supplier.
• Check invoices to avoid incorrect charges, double billing and missing discounts.

6. Supplier relations

Put most of your effort into your key suppliers

Focus on:

• supplies you will spend the most on - five or ten items may account for 90% of the money you spend.
• vital goods or services that have a major impact on the quality of what you offer.

Give most of your orders to just a few suppliers

• Get longer payment terms and bulk or cumulative discounts.
• Agree long-term supplier contracts or guarantee minimum annual purchase volumes, in return for lower prices.
• Get regular suppliers to tell you how often prices will go up, what will cause them to rise and how you will be notified.
• Avoid over-dependency on one supplier. Alternative suppliers provide competition and reduce your risk if a supplier goes out of business.

Tell key suppliers what they need to know

• Keep them up to date with your needs.
• Tell them when they are doing well and when improvements are needed.
• Invite them to meetings. Ask them for their views and ideas.

Build relationships that both sides value

• Visit the supplier's offices or factory and get to know the people you deal with.
• Treat suppliers well to build a relationship of trust.
• Co-operate to improve your goods and services and develop relevant systems and procedures together.

7. Reviewing performance

Track suppliers' performance on a regular basis

• List your key priorities and give each supplier a rating out of 20 in each area.
• Get quality improvements in areas that affect the quality of your own product.
• Compare suppliers' prices with their competitors and get them to explain their pricing policies.
• Monitor delivery, including speed and reliability.
• Assess how well they communicate with you, including speed of response to your emails and letters.

Record and compare your purchasing costs regularly

• Use a spreadsheet or cost control package to help you.

Ask for feedback from suppliers

• Send suppliers a form that invites them to rate you on issues that are important to them, such as prompt payment.

Set realistic improvement priorities

• Don't try to improve everything at once.