When 'company doctors' are called in to save businesses, the first step is often to renegotiate all the supply contracts. Suddenly hard-nosed suppliers agree to knock 5% - 15% off their prices, giving cost savings that can transform a company's future.
For start-ups, too, effective purchasing is a fast and simple way to boost profits and improve efficiency and quality.
This briefing explains:
- How to decide what to buy.
- How to pick the right suppliers.
- How to get the best out of your suppliers.
1 Specify what you want
1.1 Identify the most important features of the goods or services you require.
Decide what you want your purchase to do, and how well it should do it. Agree details with the potential supplier, and set them out in a specification. This might include:
- quality and appearance
- technical features
- delivery schedule
1.2 Do not over-specify.
Unnecessary or unreasonable specifications are counterproductive.
- Costs will be increased.
- Suppliers will be irritated.
1.3 Agree everything in writing.
The specification and the terms you agree will form the basis of the purchase contract.
The supplier will soon learn what needs to be done to achieve the standards you require.
Improvements will feed straight through to your own product or service - fewer delays, less waste, fewer complaints, and more customers.
An expert's tips on purchasing
- Buy the product that offers the benefits you want. Never buy on price alone.
- Focus your price-cutting efforts on those items you spend most money on.
- Focus your quality-boosting efforts on those items which most affect the quality of your own product.
- Keep accurate records of all purchases.
- Do not 'squeeze' a supplier if you plan to buy regularly from that source.
- Look for opportunities to pay using your product instead of cash ("I'll give you some furniture, if you do my accounts.").
2 Supplier selection
2.1 Suppliers should be easy to find, through:
2.2 Make up a shortlist and write to each supplier, explaining your exact 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.
2.3 Pick out suppliers you believe can offer the quality of product and service you need. Compare them in terms of:
- Product suitability, reliability and sustainability.
- Reputation, based on references.
- Quality and flexibility of service.
- Location and ease of communication.
- Speed and frequency of delivery.
- Price range and order size.
2.4 For long-term supply contracts, make the effort to visit those suppliers that seem to meet your quality standards. 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?
2.5 Get quotes, including details like discounts and payment terms, to use in negotiations.
- Ask how often prices will rise, what influences will cause them to rise, and how you will be notified.
2.6 Once you have narrowed the choice down to two or three suppliers, negotiate prices, discounts and levels of service.
- For a healthy long-term relationship, do not negotiate too hard a price at the expense of quality.
3 Supplier relations
3.1 Put most of your effort into:
- Supplies you will spend the most on - five or ten items may account for 90% of the money you spend.
- Supplies crucial to your production.
3.2 Avoid over-dependency on one supplier.
- What would happen if the supplier went bust?
- Alternative suppliers provide competition.
3.3 Give most of your orders to just a few suppliers.
- If appropriate, ask for bulk or cumulative discounts (eg if you order 5,000 units in the next year, you get a 5% discount on all orders during that period).
3.4 Treat suppliers well and they will treat you well.
- Keep them up to date with your needs.
- Build a relationship of trust.
- Ask for their views and ideas.
- Consider establishing long-term partnerships with key suppliers. Co-operate to improve the goods and services supplied and relevant procedures and systems.
3.5 Agree in advance what will happen if the supplier's goods are faulty.
- Will the supplier replace the one faulty item or the whole batch?
- Will replacement supplies be delivered immediately, or will you get a credit note?
- Will replacement goods be free? Who will pay for delivery?
3.6 Ensure that the supplier fits in with your ordering systems.
- Will the supplier agree always to quote your order reference?
- How will you be able to avoid paying for all the goods when part of a delivery is incorrect?
3.7 Agree on payment terms. If terms are not agreed, the maximum payment period is 30 days.
- Payments in advance should generally be avoided, especially if you are unsure about the supplier's creditworthiness.
- Ask for a discount for early payment.
4 From order to delivery
4.1 How much stock do you need to hold?
Holding stock ties up money and increases warehousing costs. Aim to minimise your stock levels and make delivery of supplies the supplier's responsibility.
4.2 How will you decide to order?
4.3 How can you avoid late deliveries?
- Make delivery terms clear, in writing, when you place your contract.
- Ensure your supplier is familiar with the time constraints that affect your business.
- Keep track of what deliveries are arriving when. Chase them up immediately if they are late.
- Always check what has actually been delivered before signing the delivery note.
- Agree delivery performance standards as a condition of the contract.
5 Look at the alternatives
Before buying any equipment, consider the various possibilities. Different choices will alter the amount of capital you need to put into your business and affect your costs.
5.1 Outright purchase of new equipment.
- Can you afford to tie up your cash in capital equipment?
5.2 Purchase of secondhand equipment.
- Will the machine be reliable?
- Is there a guarantee?
- Can the seller prove ownership?
5.3 Hire purchase of equipment.
5.4 Leasing equipment.
- A lease allows you to pay for the use of something without buying it.
The equipment can be returned to the owner at the end of the lease period - usually three to five years.
- Check the lease's small print.
For example, do you need to give notice at the end of the lease and continue paying for three months?
5.5 Subcontracting work to an outside supplier.
- Will the supplier work to the required standards and timescales?
- Can a subcontractor supply the quality that is needed at the right price and still make a profit?
5.6 Buying in ready-made components.
- Do they meet the quality requirements?
- How do the costs compare?
Be careful when buying equipment as part of the purchase of premises, particularly when taking over leased equipment. Check the exact terms of the lease and make sure all the equipment is transferred into your name.
6 Equipment specifications
6.1 If you do buy or lease equipment, think through your requirements. For example:
- Technical specifications - output per hour, accuracy, wastage, controls, safety, reliability and the machine's life expectancy.
Consider how you will use the equipment.
A more expensive piece of equipment may save you money in the long term.
- Compatibility - with other equipment, available power supplies and your premises (especially if the building is old).
- Guarantees - will the seller still be around to honour the promises made now?
- Technical support - assume everything will go wrong.
How soon will help come? Will spare parts be available? How experienced are the engineers? How steep will the charges be?
- Technical skills or training required - will you need to hire specialist staff?
- Options for expansion and upgrading - or will the equipment soon be obsolete?
Which of these requirements are essential?
6.2 What are the true costs?
- Purchase price.
- Delivery and installation costs.
- Maintenance costs - service and repairs, including parts.
- Running costs - power, lubrication, cooling and consumables.
For a major purchase, gather enough data to put together a realistic life-cycle costing.
Beware of long maintenance contracts. Read the small print and make the supplier spell out your present and future commitments.
7 Office supplies and services
7.1 Purchasing office supplies is often regarded as unimportant. As a result, many start-up businesses end up paying too much.
- Make the initial choices yourself. Then give one person responsibility for reordering.
- Do not overstock. Almost all suppliers will offer you next-day delivery.
- Office supplies specialists eg Staples will usually beat the prices on offer at your local suppliers.
7.2 Contracting out services can be more cost effective than using permanent staff.
- Examples include cleaning, maintenance, security and computer services.
- Potential benefits include lower costs, more flexibility and access to continually updated technical expertise.