Sharing Purchasing's Bottom Line Value
PurchTips edition #47
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):
|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:
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.
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