Many small companies have effi cient purchasing manag- ers, but they may not have highly effective ones, at least when it comes to cost consciousness. When I interview other small company CEOs about their purchasing managers, they usually say that the purchasing heads “know their stuff” and have estab- lished good relationships with vendors. When I ask if they show a talent for negotiating great deals or creativity when it comes to making purchases that pay off in the long term (rather than meeting only a short-term need), they often look at me blankly.
The job description for a purchasing manager often doesn’t include these attributes.
Therefore, start out with a list of the following extra credit qualifi cations the next time a position opens in your purchasing department:
___ Derives a sense of accomplishment from negotiating a better deal than the previous one.
___ Has a track record of fi nding ways to cut costs across the board.
___ Is astute about how far to push suppliers in terms of price and does so without being unfair or obnoxious.
___ Is willing to shop around for better deals, even though this requires a greater investment of time and effort.
___ Networks well and often fi nds bargains and superior sup- pliers through this network.
SmallBusinessSP.indb 143
SmallBusinessSP.indb 143 2/27/07 9:57:20 AM2/27/07 9:57:20 AM
___ Has good judgment about when it’s cost-effective to pay more in the short term for a high-quality, longer-lasting product.
___ Can evaluate service providers not just on the basis of price but on the value they add through trustworthiness, commitment, and other intangibles.
___ Is able to differentiate something that’s cheap from something that is a good bargain.
___ Evaluates suppliers continuously rather than fi nding a good one and sticking with it, no questions asked.
___ Makes sure inventory on critical supplies doesn’t run low and is proactive about ordering in advance so that there are no premium charges for emergency purchases.
Here’s a story that illustrates why the previous checklist is important when both hiring and measuring the performance of a purchasing manager. Larry had been the top purchasing execu- tive for a small manufacturing company for 15 years. He always received above-average rankings on performance reviews and got along well with everyone. The company’s new owner, Marie, bought the company about two years ago and was troubled by certain peculiarities about how the department functioned. For one thing, Larry reported to the controller, which struck Marie as odd. The controller knew relatively little about purchasing and thus could not really hold Larry accountable. Second, Marie found that every so often, shortages occurred in raw materials or the company ran out of tooling, and Larry didn’t have a good explanation of why these things happened beyond “That’s just the nature of purchasing.” Third, one of the company’s manufactur- ing managers ordered replacement parts and other materials on her own rather than go through purchasing, claiming that it was easier for her to do it on her own.
Marie decided that Larry might do a better job if she became Larry’s supervisor. Within a few months, however, Larry decided
SmallBusinessSP.indb 144
SmallBusinessSP.indb 144 2/27/07 9:57:20 AM2/27/07 9:57:20 AM
145 Purchasing Everything from Cleaning Services to Coffee
to leave the company, claiming it was too stressful having Marie as his boss. Using the criteria in the checklist, Marie hired a new pur- chasing manager, and the change in purchasing cost-effectiveness was immediately apparent. No longer were there costly shortages of materials. All purchasing became centralized and highly effi - cient; no manager in any department was making signifi cant pur- chases without going through the purchasing manager. Perhaps most signifi cantly, Marie found that the new purchasing manager cared enough to fi nd ways to drive purchasing costs down, whether through reassessing suppliers or negotiating new and improved deals with current suppliers.
Another recommendation from small business owners is that you set up a bonus program to motivate the purchasing manager to meet objectives. Here, you should set the bar high initially for purchasing managers: to receive the bonus, they must save 1.5 times their salary through wise purchasing deci- sions and policies. Create a centralized system to monitor and record monthly savings.
When we implemented this incentive program, our purchas- ing manager generated a $75,000 cost savings in the fi rst year!
He helped reduced our raw material costs through bargaining and comparison shopping, and he also instituted a policy of buy- ing material closer to the fi nish thickness we needed; this mini- mized the extra machining necessary to make parts that fi t our customers’ requirements.
Obviously, to meet or beat objectives in the second year requires a certain amount of ingenuity—once you’ve made certain changes in purchasing strategy, you’ve already cut the most obvious costs.
Our purchasing manager, in his second year of this incentive pro- gram, called each and every one of our suppliers and asked if they would offer early payment terms, requesting that if we pay within ten days, we receive a discount. This whole process of negotiating payment terms is really a three-step process. First, the purchasing agent needs to negotiate the best possible price from the suppliers,
SmallBusinessSP.indb 145
SmallBusinessSP.indb 145 2/27/07 9:57:20 AM2/27/07 9:57:20 AM
asking for discount terms. Many suppliers appreciate getting their money quickly from their customers. Cash fl ow is critical, and they will offer discounts if you pay your bills in ten days or less rather than the typical 30-day terms. Negotiate your best price fi rst, and then ask if the supplier offers discounts for early payment terms.
This is something that most salespeople will not present to you, so you have to ask. Typically, the salesperson wants the sale and is not going to protest these terms. As I mentioned earlier in Chapter 9, we saved $22,000 in 2005 by taking advantage of discounts.
Second, ask if they accept credit card payments. If you can get a supplier to give you early payment discounts and allow you to pay by credit card, you are being fi nancially savvy. If you are turned down on your request for early payment discounts, use the credit card request as a bargaining tool. If the seller agrees to this, you receive an extra 30 days to pay and as much as 45 days if you time it right. You also receive points that can be applied to your card’s reward program. Last year we accumulated 375,000 points on our credit card. At 30,000 to 35,000 points per airline ticket, that’s ten free fl ights per year.
Finally, if the supplier does not offer discounted terms and will not accept credit card payments, then request 60-day terms to pay your bills rather than the normal 30-day terms. The extra 30 days beyond normal terms is extremely helpful in improving your busi- ness cash fl ow. Lack of proper cash fl ow is one of the major factors in business failure today. Extended payment terms are especially helpful in businesses that are just starting out or in a growth mode or those that have expensive inventory.