Sharing Purchasing's Bottom Line Value

PurchTips edition #47


Click here for the printer-friendly version.

This resource begins with a story...

ABC Company's owners were unhappy with its recent profits. Every year, ABC's pre-tax profit was equal to about 10% of its sales. This past year, ABC had sales of $100 million and pre-tax profit of $10 million.

ABC's owners demanded that the president, Charles Aybisi, increase pre-tax profits to about $15 million or else he would be fired. At first, Aybisi thought that he would have to increase sales by 50% to achieve the profit target. But he examined this financial breakdown of ABC's operations (all amounts in millions of dollars):

Sales 100
Purchased Goods/Services 50
Labor/Salaries 30
Overhead 10
Pre-Tax Profit (10%) 10

ABC never paid much attention to its purchasing department in terms of financial goals or training. However, Aybisi wondered what would happen if purchasing received more emphasis. He mused, "What would the effect on profits be if we looked to purchasing to save money on the goods and services we buy?" Then, he drew a new financial breakdown assuming that purchasing could save 10% on goods and services:

Sales 100
Purchased Goods/Services 45
Labor/Salaries 30
Overhead 10
Pre-Tax Profit 15

Abisi had an enlightening moment: a 10% reduction in purchase prices (a realistic goal if using best practices) would produce the same effect as a 50% spike in sales!

What do you think is easier: reducing purchase prices by 10% or increasing sales by 50%? Obviously, reducing purchase prices! Using techniques like negotiation, competitive bidding, standardization, and value analysis, well-trained purchasing departments can contribute to profit improvement like few others.

Want others in your organization to understand the value of purchasing? Share this resource with them. Then figure out how you can similarly impact the bottom line.

Do You Want a More Rewarding Procurement Career?

Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.

Earning your SPSM® Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM® Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!


Need Better Performance From Your Procurement Team?

Are you a procurement leader whose team isn't achieving the results you know are possible? Maybe it's not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.

You need a performance improvement plan that's easy to implement and quick to produce results. The NLPA can help.

Download our whitepaper "The Procurement Leader's Guide To A More Successful Team." You'll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.


Are You Getting The Most Out of Your NLPA Membership?

Members of the NLPA get more than just articles like this by email. As a member, you also get access to:

  • The Procurement Training & Certification Starter Kit
  • The latest Purchasing & Supply Management Salaries Report
  • Leading-Edge Supply Management™ magazine
  • Members-only webinars 10x per year
  • And more!

If you haven't been taking advantage of these benefits, why not log in and start now?