GUEST
ARTICLE - Otto Pipke
Tips to Improve Your Purchasing
Performance
1. Supplier Selection
Supplier selection can be as simple as looking in the yellow pages or reviewing the Frasers Canadian Trade index. To be more judicious, you need to first understand the buying clout you have in a given market. If you are a small fish in a large ocean, then your buying clout may be insignificant. If, however, you are a large fish in a small lake, then your clout may be substantial.
Supplier selection should be based on what your needs are and who can best serve them. Large firms may see you as the small fish and may not be flexible to meet your requirements. Mid-size or smaller firms may be more suited to respond to your requirements.
Sourcing locally may be a more cost effective way, as you do not need to be concerned with damaged goods or late deliveries from out of town suppliers. Carrying inventory would also be lower or non-existent.
2. Competitive Offers
When obtaining competitive offers, the request should be sincere. Suppliers soon recognize bid shopping and then they will no longer reply to your requests. To obtain bids and then cancel and place the business with a preferred supplier who is not the best value can put you in breach of the “Laws of Competitive Bidding”. When going the competitive offer route (be it a Tender, Request for Proposal (RFP), or Request for Quotation (RFQ), you provide the bidders/Proposers with all the information they need, so they can provide a bona fide offer. Treat all bona fide bidders fairly and equitably. You will provide them, in your request documents with well thought out evaluation criteria as to what is important (i.e. quality, service, capability, timeliness of delivery or service provision and price).
When evaluating offers, you must play by the rules you have established. You can only evaluate compliant offers, you must reject non-compliant offers and you can’t change the rules or the evaluation criteria.
3. Inventories
Inventories usually fall into two categories – too much or too little. Inventory should only be carried when there is no other cost effective way of meeting the demand requirements. In-house inventories have a tendency to grow, become obsolete and are often the wrong items. Whenever possible you should buy from your suppliers inventory as frequently as practical. In-house inventories are absolutely necessary in a retail business as stock-out means lost sales. In other operations, inventory needs to be paced with the service level (say 95%) you want to provide to your customers. Consumption inventories should be at a bare minimum.
On the other hand, if you have an opportunity to buy up extra inventory in order to avoid shortages at a later date, then it may be a prudent move. An evaluation needs to be made as to the cost of the projected shortage and include storage space availability, handling, shrinkage, obsolescence, investment foregone, future price increases, etc. If, as a result of the evaluation, you find that the overbuy is projected to be cost effective, then inventory is no longer a cost but a benefit.
4. Nepotistic or Reciprocal Buying
By placing business with family or
friends, you are using decision criteria that does not fit with prudent purchasing practices. When faced with the foregoing situation it will avoid criticism of unfairness if the requirements are obtained as a result of competitive offers. All parties who can meet the requirements then have the same opportunity to bid for the business and you will treat them fairly and equitably as previously discussed under Competitive Offers.
5. Gifts, Favours, Incentives
There is no free lunch. Any form of gratuity is intended to position that supplier more favourably than another supplier. If you are seen as a person who favours suppliers who provide gratuities, then it becomes a contest between suppliers to continually increase the favours in order to get your business. These start with lunches and can progress to professional sports tickets, dinners, golf weekends, multiple weeks vacation at a resort, etc. Eventually you will lose the objectivity of buying best value and focus more on what’s in it for me. Remember all gratuities must be paid for; therefore they are in the price of the product you buy.
6. Standardization
To reduce overall costs of doing business, it is beneficial to standardize as much as possible without jeopardizing the quality or uniqueness of your product. Standard products are more readily available and on short notice. This reduces the need to carry as much or any inventory. Therefore, reducing the cost of doing business.
7. Suppliers Rationalization
Too many suppliers make administration costlier. It is prudent to look for reliable, capable suppliers and deal only with the best. If you don’t need service provisions, then sourcing should be as close to the manufacturer as possible.
8. Credit Cards (procurement cards)
To reduce cost of processing and matching of invoices with purchase orders and receiving documents. It is more cost effective to use a corporate credit card. If your business is large enough, then a number of procurement cards could be your
answer.
On a credit card your business needs to only have one company determine your credit worthiness. You can use the card for many smaller dollar purchases, which are costly to process individually and you do not add value in the transaction. You get one statement, which you pay and then charge the various items out to the appropriate accounts.
With the corporate procurement card, you make the employee sign an agreement that they are personally liable for charges incurred and you set limits that are appropriate for that persons requirements. When selling this process to the vendors, you point out that they get paid faster (i.e. immediate or within one week) by the credit card company and therefore have the cash to work with sooner.
9. Volume Purchases
In order to obtain the best-cost reductions for your business, it is beneficial to contract with the supplier who can provide you with what you need on short notice and you use the combined purchase for a year as incentive to obtain better discounts. If you have confidence in your vendor, you could make multi-year commitments. This provides stability for both parties and will usually provide for better discounts. A further benefit in this type of arrangement reduces or totally removes the need to have inventories. This type of contracting is effective in the acquisition of office supplies, electrical wiring, plumbing supplies and any other items that are very costly to administer and are generally of lower value.
If you have an annual need for some specific item that you require repeatedly, then it may be more cost effective to try to buy these types of items from a manufacturer.
There are many variables to the foregoing suggestions and they need to be tailored to fit each specific business requirement.
10. Contacting for Services
In contracting for services, you face the biggest challenges in the procurement area. First of all you need to know what is required, how frequently and what measurement criteria will apply in order to determine value for money. It is imperative that performance criteria and measurement of that performance is front and center when obtaining offers from service providers.
Performance criteria should spell out that the service provider would do this. This and this every time they provide the service and they will do that and that on a say 3-month basis and some other thing on a 6-month basis. They should be required to sign off on each item that is to be done, when it is done.
When contracting for services, the incentive should be for the contractor to want to perform and that non-performance will result in “liquidated damages” charged back on their revenue – i.e. a photocopier should perform as contracted and that down time of say in excess of 4 hours per month will result in charge back. This provides for incentive for service provider to perform. It is important to determine up front if the service provider has the expertise and resources to do what you require.
11. Competitive Offers
If you have used a competitive bid process (i.e. Tender, Request for Proposal (RFP), Request for Quotation (RFQ)) and you have made a commitment based on the terms and conditions in your document, then DO NOT ever sign the suppliers sales or service agreement. The significance is that when you sign their agreement, you have agreed to their terms and conditions, which will be different to what you originally contracted. When you sign the supplier’s agreement, you supercede the work you did in the competitive bid process.
12. Suppliers'/Service Providers' Contracts
If you are required to sign suppliers'/service
contractors' contracts, it is prudent to read the documents very carefully in order to understand all the implications. When in doubt get legal review and advise. Some suppliers/service providers have very onerous clauses in their documents.
For example, a service provider will have clauses that absolve them from any acts or performance regardless of the circumstances and in some cases cannot be sued for illegal acts that may be performed by their representatives. Length of term should be negotiable and not imposed by supplier. You are spending the money, so you should have a say as to how long you are contracted for. i.e.(1 yr., 2yrs., 5 yrs.)
13. Evergreen Clauses
Many suppliers of services have an automatic renewal (evergreen) clause in their contracts. These clause provide for an automatic renewal of the contract for the same length of term as previously contracted and that the customer (you) must notify supplier 60 to 90 days prior to anniversary date if service is not to be continued. All renewals of contracts should be so worded that you say yes to the renewal or the contract expires.
One serious impact of an evergreen clause is that, should you leave the company, these types of contracts can go on indefinitely as your replacement may not aware of them or their cancellation requirements.
14. International
Procurement
Those of you that do international procurement frequently, should be aware of the changes the Canada Customs and Revenue Agency (CCRA) has implemented on October 7, 2002. Those of you who do international procurement infrequently, you need to understand the implications of this new set of rules.
CCRA implemented the Administrative Monetary Penalty System (AMPS) on October 7, 2002. This system provides that the importer of record (you) is required to ensure that all documents are there and completed accurately for every entry of goods into Canada. If you have a customs broker to do your clearing, it is critical that you have them under contract that they will be liable to you for any errors they may make on your entries. You as the importer of record will always be liable to CCRA but anyone doing work for you in this regard should also be liable to you for their actions.
The AMPS system provides for fines ranging from $100.00 per occurrence for minor errors (i.e. wrong digit) to $25,000 for more serious indiscretions.
Most fines are progressive and some are an amount or a % of value of goods. CCRA will do audits in the future and can go back for up to 4 years when an audit is done. Errors will be subject to the specific fine as stated in the CCRA documents. If you don’t have an agreement with your broker holding him/her responsible for their errors, then you will pay the fine and have no recourse on anyone. In this regard, it is prudent to have clause(s) in your documents clearly stating what the vendor is required to do when shipping goods and the necessary details of completing all forms.
We hope that the forgoing points will be helpful or at least let you think of other approaches to meet your needs.
Otto Pipke of Otto Pipke
Professional Associates Ltd. can be reached at (403)
284-1515 or by e-mail at oppal@telusplanet.net
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