For hardware-centric startups with a strong focus on procurement, managing purchasing costs is critical to maintaining profitability. Unfortunately, without proper management, these costs can quickly spiral out of control.
From personnel costs to shipping and handling fees, procurement costs cover a wide range of expenses that can add up quickly. That's why it's important to have a clear procurement process, encourage competitive bidding, and make it easy for vendors to work with you. But perhaps the most effective way to reduce purchasing costs is by implementing a purchasing platform or software.
With a streamlined procurement process that includes supply inventory tracking, supplier searches, and vendor management, software can reduce costs by automating many of the tasks that would otherwise require significant amounts of staff time. In this article, we'll explore the different types of purchasing costs, best practices for reducing them, and the benefits of using a purchasing platform.
First, what are purchasing costs?
Generally speaking, there are two types of procurement costs. Most startups think of them as the cost of doing business or general overhead, but they do represent opportunities for potential savings. For instance, your purchasing department can run efficiently or get bogged down in paperwork. As we’ll discuss later, purchasing software helps with this process.
Procurement: another word for purchasing
Before we go further, it’s important to note the definition of procurement. This is the process of sourcing and purchasing goods, services, and raw materials to run your company. For many companies, it includes supply inventory tracking, supplier searches, and vendor management. It also requires a purchase requisition, purchase approval, negotiating of purchase order terms, receiving the supply shipment, and tacking inventory.
Purchasing costs take many forms
Here’s the thing: purchasing costs include a wide variety of fees, logistics and vendor costs, and human capital. As a rule, these costs encompass every step of the procurement process that we mentioned above, each of which are easier on a purchasing platform. Let’s look at these in more detail:
- The cost of goods and services: In other words, what your vendor ultimately charges as the base price. For example, purchasing platform subscription costs or the price of 5,000 bolts. Arguably, this is what people outside your purchasing department are most familiar with.
- Personnel costs: Most people don’t think about it this way, but having purchasing division staff is in itself a cost. They have to do the filing, supplier selection, purchase order and approval, payment requests, and other clerical tasks. Even use of a purchasing platform requires staff time, which costs money.
- Shipping and handling: A chronic irritant even to individual households, these are a key procurement cost item. And, these add up over time, which is why good purchasing software logs these fees.
- Government fees: Especially for a supplier overseas, you might have to pay excise taxes, duty, and similar import costs on top of shipping. This is something your purchasing department should consider when choosing a vendor.
- Purchase order terms negotiation: While most routine procurement is simple, sometimes you need lawyers and other professionals to help reach a win-win with your supplier. Also, in some cases you’ll need international contract reviews as part of your purchasing process.
- Inventory brokerage fees: Particularly if you’re buying a supply overseas, you might need an intermediary. A purchasing platform can help find the right items, but negotiating purchase order terms outside of your home country or region might need outsourced help. This incurs fees which can add up quickly.
Second, how can a hardware-heavy startup reduce purchasing costs?
As you can see, purchasing costs are relatively complicated and include less obvious aspects of overhead. However, even a startup can manage these costs with a purchasing platform and an adequate purchasing process. Most, if not all, of these purchasing costs can be managed carefully to ensure optimal business value.
Avoid unnecessary costs
As most of us ask in household budgeting, “do you really need it.” In other words, make sure that before a purchase requisition gets approval from the purchasing manager, the goods and services are necessary. For instance, without proper inventory controls it can be easy to re-order a supply before it’s time.
Likewise, as the saying goes it’s easy to be “penny wise and pound foolish.” In other words, it can be easy for your purchasing process to automatically select the lowest-cost vendor. However, if something breaks all the time due to poor quality, the repeated procurement will drive up your company’s costs fast. Likewise, especially with a turbulent global supply chain, buying something from much farther away can easily neutralize your unit price savings over a local supplier.
Have a clear procurement process
And train your employees to follow it. In other words, how does your purchasing move from requisition to the warehouse and final payment? It’s important that everything go through your purchasing department whenever possible. While you can always have a small reimbursement budget for incidentals or business travel, any major supply purchase needs to go through proper channels. This way, you can track everything and avoid problems like maverick spend getting out of control. Plus, clear processes reduce costs because everyone has a defined role.
Try competitive bidding
One thing that most government entities and some nonprofits get right is competitive bidding. Here, you tell different vendors what you want, then ask them to name their price. This lets the suppliers compete against each other or give you better purchase order terms in exchange for your business. However, you’ll also want to avoid buying inferior products at the same time.
Make it easy for vendors to work with you
If you’re a preferred buyer, many suppliers will treat you better. For instance, they might tell you about upcoming product upgrades before other people, giving you a chance to maximize value. Or, you may get a better price because they value your business and it’s a win-win. To do this, keep track of your suppliers and make it easy to request payment. For instance, payment portals can be part of your overall procurement platform. In this case, they’d send an invoice directly to accounting.
Third, how can purchasing software help save money?
Ultimately, even if you follow the other best practices above, it’s easiest to realize purchasing cost savings with a purchasing platform or other software. While you might think of the subscription costs of purchasing software as just another item to pay for, it reduces costs in other ways. In other words, it’s a good value for money for several reasons.
It streamlines your purchasing process
With software, you have all or most aspects of your procurement process in one place. One employee can fill out a requisition in the system, and then other staff complete the rest of the process without all the paperwork. Since paperwork gets lost and needs to be filed, automation reduces costs significantly.
It keeps track of supply levels, suppliers, invoices, and other moving parts
Because a purchasing platform automates most of the purchasing process, it takes a lot of guesswork out of keeping your company properly supplied. For instance, procurement software like ControlHub will tell you when it’s time to reorder something based on analytics. It’ll also alert you to potential cost savings, track invoices, and streamline payment.
In other words, with a proper purchasing process and the right software, you can reduce costs more easily. Software reduces waste, improves staff productivity, and takes much of the guesswork out of procurement.
Learnings
For hardware-centric startups, managing purchasing costs is critical to maintaining profitability. Procurement costs cover a wide range of expenses, from personnel and shipping fees to government taxes and inventory brokerage fees. To reduce these costs, startups can implement a clear procurement process, encourage competitive bidding, and make it easy for vendors to work with them.
The most effective way to reduce costs is by implementing a purchasing platform or software, which streamlines the procurement process, keeps track of supply levels and invoices, and automates many tasks that would otherwise require staff time. By following these best practices and using purchasing software, startups can reduce costs, improve staff productivity, and increase business value.
