Small purchase bleeding nation
COMPANIES are struggling to sustain operations due to high operating costs and subdued demand for their products. As a result, many of them are rationalising operations to curb increasing operating costs.
In these trying times, indeed rationalisation is the way to go, although it has often resulted in many people losing jobs as companies try to reduce costs.
It is, however, important that under these difficult times every aspect of the business be scrutinised for purposes of identifying opportunities for cost saving.
One area of business requiring scrutiny is the purchasing function.
Purchasing departments are responsible for the purchasing of materials, components and services required by the business.
Research has shown that at least 60 percent of the expenditure budget of any business is attributable to purchased items. As such, this is an area where, if cost savings can be achieved, many jobs may be saved, thus providing companies with some financial breathing space.
Purchasing departments can therefore be crucial in helping companies achieve financial stability in a difficult environment.
The mandate of every purchasing function in an organisation is to maximise on total spending.
In essence, the objective should be simply to spend less and get more of purchased materials, components and services.
The purchase of requirements can be routine or can be a completely new transaction. Routine purchases can be everyday orders and most of them small value orders.
New purchases are in most cases as a result of capital expenditure and maybe high value in nature.
For high value purchase orders, due diligence is always carried out by the purchasing personnel all the way up to company executives.
Such transactions are very transparent because of the large sums of money involved.
Indeed, such transactions warrant the attention of top management as the company will be seeking to maximise value for money.
Such transactions are straight forward and, in many cases, all relevant people are involved in the decision-making. The same cannot be said about small purchase orders.
Small purchase orders are those in the public sector that fall in the competitive tender category and in the private sector purchases that are not classified as capital expenditure.
Small orders are high frequency in nature as the items purchased are mostly consumables. These orders are processed by purchasing officers at departmental level.
Since these purchases are small and routine, managers that sanction them do not give much time to examine the value of such orders to the business. In other words, these small orders are hastily processed and chances are very high that there won’t be any value for money in these transactions.
One simple reason is that by merely looking at the order value which, in many cases, is a small value, managers are inclined to signing them through.
This problem is compounded by the fact that those signing off the orders do not keep track of how many times the same item is ordered weekly or monthly. When the small orders are aggregated at the end of the year, the amounts spent run into hundreds of thousands of dollars which have a negative effect on any company’s financial position given that most of these order are not value for money.
It is common knowledge that the purchasing department is susceptible to corruption and it is one major reason why small orders are never value for money. These orders are mostly placed with retailers and not the manufacturer of the product or authorised dealer of foreign manufacturers.
The retailers resort to bribing purchasing officers in order to get orders, hence quoting exorbitant prices. When business is in recession, corruption is rife as companies adopt unorthodox means to survive.
In a difficult business environment, as currently obtaining in Zimbabwe, a business must priorities buying direct from the manufacturer or authorised dealer in the case of foreign manufactured products.
Manufacturers and dealers accept orders regardless of the size because they also want to increase their sales. This will save the business from paying middlemen unnecessary margins and also potential bribe premiums.
Eliminating retailers from the supply chain may sound cruel, however, protecting the health of the business is of paramount importance.
Big businesses are not easy to resuscitate once they have failed, compared to small businesses. Even where corruption is not involved, companies should prioritise buying direct from the manufacturers.
Where consumption of a certain material is predictable, it may be necessary to buy in bulk and negotiate for better payment terms with the manufacturers, which can create value to the business.
Buying in bulk may also be best suited for imported materials and components; the business will avoid paying for margins charged on the cost of the product, duty and transport costs.
The devastating cumulative effect of small value orders must not be under estimated. Companies are losing thousands of dollars through such orders, threatening their future existence.
Every purchase order must be examined for value to the business regardless of its size. Purchasing departments must take the lead in making shrewd purchasing decisions that benefit business organisations.
Purchasing practitioners must shun corruption, and must prescribe procurement strategies that help the business to be competitive.
Every dollar that has been saved is a dollar that has been earned. Purchasing departments must be appraised on how much has been saved, while, at the same time, ensuring adequate supplies for the business.
Bongani Mushanyuri is a lecturer at the Bindura University of Science Education. He can be contacted on firstname.lastname@example.org