Update Your Purchasing System

Save time and money with streamlined supply management

Are you paying too much to buy and manage inventory? Buying bundles of services or products that you don’t need, just to get the one thing you want? Using unwieldy purchasing software—or no particular system at all—to track purchase orders and fulfillment?

Many small businesses wind up losing dollars when they try to save pennies on purchasing. But by using on-demand contracts, unbundling items, negotiating better terms with vendors and using online or industry-specific software, you can get those dollars. Try these five expert tips to revamp your procurement procedures and bring them up to date.

• Deploy on-demand contracts

Just-in-time inventory is no longer just for giant manufacturers. “The big issues are the space that it takes, and the fact that you can better utilize that space for other things depending upon the industry you’re in,” states Michael L. Bohon, a supply chain consultant for OMSolutions in Richmond, Va. “In the case of manufacturing, [you could use that space] for production facilities. The other big issue is the labor that it takes to manage an inventory.”

An on-demand contract allows you to purchase supplies in advance of need, usually at a quantity discount, without keeping inventory. The vendor simply guarantees that those materials will be available to you when you want them. You get a discount for ordering, say, a year’s worth of materials or supplies, but pay as you go. The added advantage is not having to keep that inventory on your premises.

Caveat: You must plan carefully and avoid over-ordering. Most on-demand contracts have built-in charges if you don’t take all of the supplies you ordered, cautions Maureen Donnelly, a spokesperson of the Institute for Supply Management (ISM) and a senior manager in strategic sourcing. “Typically, if you don’t meet the guarantee, there’s an associated penalty,” she says.

• Avoid Bundling

“Bundling is ordering a full meal as opposed to a la carte,” says Donnelly. “I don’t think it’s a good purchasing practice. I may be buying something in that bundle that I don’t really need or want.”

Suppliers like to bundle because it helps their business, but it’s not unlike those bundles that cell phone companies offer, Donnelly says: You wind up paying for text messaging, ring tones and unlimited minutes—when all you want is basic service. Look at each item of any bundle, understand what you’re buying, and insist that the offer be restructured to include only those things that your business requires.

• Pay fast, pay less

You can take pride in paying all your vendors within 30 days. But if you have the cash flow to do that, you may be able to pay even faster—and qualify for discounts. For example, you might negotiate “2 %/10 Net 30” terms with your vendor: You get a two-percent discount off the invoice amount if you pay it within 10 days. If not, you must pay the total amount in 30 days.

Don’t be afraid to press vendors for a better deal. The only way you will find out if you’ve got the best terms is by negotiating and the most useful weapon in negotiating is information, says Bohon. “If you have information—not only about what your needs are, but about the needs of the other side—you go in well-armed,” he advises. Try to learn what terms the vendor gives other customers. Determine how important your business is to the supplier. And learn about his business cycle—can you synchronize your purchases for when he has excess inventory on hand?

There are many useful bits of information that can help. For example, “If you can find out if they’re getting updated equipment or products in and they need to get rid of the products on the shelf, then you’re going in with some strength,” Bohon says.

• Take advantage of vendor Web sites

Many suppliers encourage buyers to use online supply systems, which can reduce the time your company spends finding and purchasing items.

“Staples, for example, puts your [supply] catalog on its Web pages, so you call it up and you’ve got your order list,” Donnelly says. Your employees can go in and see their shopping cart and just re-order when necessary.

These systems save money for the supplier and many pass on discounts for online orders. “Small businesses won’t be able to get the same volumes discounts as Fortune 500 companies, but there are other ways to get added discounts,” says Donnelly.

• Find purchasing software that suits you

Supply management programs can help you track purchases and keep costs down. Ariba, for example, makes sure that employees can only buy from suppliers with whom you have a contract, guaranteeing that you stay within your budgeted price. “They don’t have carte blanche,” says Donnelly.

Generic purchasing software may be attractive—especially if you don’t have a purchasing system now—but it’s best to have something tailored to your business. “I’d find software that was more specific to my industry and answered my needs very definitively, rather than software that is trying to cover the needs of everybody in every industry,” Bohon advises. For leads on packages for your business, contact your IT supplier and industry associations.