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Make sure you know where your costs are, and attack the biggest first. Apply the "80/20 rule" – typically 80% of costs come from 20% of your supply items or services.
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Check to see if your business has recently tendered out the products and services purchased. If not, how do you know you are enjoying the best prices? Challenge existing suppliers to review their prices. With fuel and commodity prices, in particular, softening over the last couple of months, there should be room to re-negotiate prices with your suppliers.
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Join a buying group for the most routine costs such as stationery, telecoms, utilities and cleaning supplies. This can free up valuable time to concentrate on the more critical, higher value cost areas such as salaries. The economies of scale achieved by such buying groups also deliver an opportunity for small companies to secure prices normally enjoyed by their largest competitors.
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Communicate early with your suppliers if your company is struggling. They will appreciate your honesty and do all they can to help you in the short term, perhaps by extending payment terms.
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Work with your key suppliers to jointly review the supply chain and challenge how things are currently done. Could things be done that would reduce total costs in the supply chain, of cost benefit to both you and your supplier? Examples might be to consolidate orders to reduce delivery costs, consignment stocking, reduced transit packaging.
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Consolidate the number of suppliers if possible – this will not only enable you to strengthen your bargaining position with suppliers, but it will also reduce the cost of administering each supplier's invoices, orders, etc.
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Be sure that everything you buy is actually needed. Consider postponing buying decisions or possibly buy the product second hand.
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Finally, introduce an incentive scheme that encourages all of your staff, not just those involved in purchasing, to come up with ideas for saving the company money. The reward might be an extra day's holiday for the member of staff who comes up with the biggest cost saving idea. The great thing about this idea is that it not only saves the company money but also encourages a team spirit within the company and reminds people that wasting money can have a detrimental impact not just on the shareholders and senior management but on their own prospects.
Yes, times are tough and getting increasingly more so. But there are plenty of opportunities to reduce costs. And by becoming more cost efficient now, companies will be more ready to take advantage when the good times come back, as they inevitably will do.
About the author
This article was written by Matt Roper, MD and founder of the Buying Support Agency, developed specifically to help small and medium sized businesses to improve their purchasing practices and thus become more profitable via reduced costs and greater business efficiency - something that is of critical importance in these times of credit crunch and sales revenue decline.
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