Minimizing Expenses in Industrial Supply Chain Operations
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Purchasing is a very powerful function in a company. Buying too much or too soon can burden the cash flow to the extent that some suppliers may not be paid within their net terms schedule. Or worse yet, the company cannot meet basic payroll or other operating expenses. Buying too soon stunts inventory turn counts, increases carrying costs, and prolongs any returns on the inventory investments.
There is also the danger of an excess quantity of parts being caught in a phase-out process or even an immediate discontinuance by loss of demand from either the factory floor or the end customer base. So there are safeguards where purchase orders over a certain value must have multiple authorizing signatures or the company may have implemented a spending limit that forces “special buy” permissions before any order can be placed.
In that event, R&D might be impacted if those special buy items include test equipment or non-recurring engineering charges, (NRE). Whatever the final outcome, purchasing carries an awesome responsibility to individuals and departments inside and outside of the company. Along with that power comes influence.
Power is absolute influence, but influence is not absolute power. Let me give an example. If I own 5 percent of a company’s stock, I have influence. If I own 51 percent of a company’s stock, then I have power. Purchasing, having both power and influence, must consider how to use that power in the right and proper manner and to use the influence to help drive the company towards profitability. If two distributors are selling the same supplier part number at comparable costs and comparable lead-times, then the buyer can make a fairly independent decision about how his or her purchasing power is to be wielded.
Beyond cost and lead time, purchasing can now impact professional relationships by either picking a favorite supplier, dividing the order into two separate orders, (company cost go up for administration of multiple orders) or entering into negotiations that end up favoring one supplier over another. Remember the negotiation phenomenon requires leverage so the leverage a buyer has is the value of the final order and the relationship carrot that encourages future business.
These two bits of leverage are not necessarily mutually exclusive. Perhaps a distributor cannot come down on the pricing to compete with the alternate supplier, but it might be able to adjust the terms from Net 30 days to Net 60 days in order to get the entire order. The other supplier may offer the same terms adjustment and suggest free shipping as an additional incentive. Now the buyer is in a position of power with the suppliers and a position of influence impacting the company’s cash management operations. There are dozens of other examples. Having established the fact that purchasing has power and influence, let’s make sure we stay ethical and friendly towards our suppliers. We know that:
- We do not share the competitors price with the other potential supplier
- We do not try to weasel for an all-expenses-paid round of golf at Pebble Beach
- We do not make promises that we have no power to keep
- We do not make a deal so hard to meet that it is beyond reason
- We do not make up numbers to beat
We also know that:
- We do get back to all supplier candidates with our final decision
- We do inform them why they won or lost the opportunity
- We do let them know how much we appreciated their extra efforts
- We do let the supplier that lost the bid know that there will be other opportunities
- We do ask all suppliers how the negotiation process could be expedited or improved from their perspective.
Being in a position of power and influence is a privilege. If you imagine yourself on the receiving end of a power situation, remember what makes the entire exchange work is when there is no abuse of either the power or influence. Maybe it would help to think of yourself as a 1 percent owner in a company with all of your assets at risk while being up against the 51 percent owner who has only pocket change on the line.
When I worked at Microsoft, I had power and influence over outside sales representatives just because I was the one deciding which parts we would use in a design. In this case the “we” stood for a multibillion dollar company that made or broke other companies based upon patronage alone. I felt the power, but I was a gentle giant and used the influence to the benefit of all concerned. Business is all about money. I understand that. But if you can have your cake and eat it too, why not use your power and influence to try to feed everyone at the table.
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