Purchasing: The quickest route to more profit.
Without having to work hard.
What I am about to share with you here is from my own experience. It is from what works when you want to improve your purchasing, that is save more money and bring straight to the bottom line. I draw on my experience of purchasing when I had a budget of €15,000,000 to look after for a hotel group.
I needed to make sure every buying decision made an impact as that was how I made my impact to my back pocket, in other words my bonus at the time. My ego also needed me to succeed as I wanted to be better than my predecessor. I know very few of you will by spending €15,000,000 on your purchases but what I will share with you has been saving my clients 10s of thousands of Euro over the last 7 years. Clients have saved on average €21400 by adopting what I will share with you.
Most medium to large Hotels, Restaurants and Gastro Pub will have a purchasing spend of anywhere from €350,000 to€1,200,000. So, what would a 5-10% saving look like. 5% is doable when you do these things that I am about to share. A 5% saving on the range of purchasing spend would equate to €17500-€60,000. Well worth the effort.
You will find this to be practical simple guide to better procurement. I hope you find value and benefit from reading this short guide
It is a practical step by step approach to purchasing. It is direct and to the point as I am sure you will agree being the top officer/manager or owner in your organisation you don’t have the time for waffle nor do I. If used you will get great benefit from this document and it can be used time and again.
With that said let’s get straight to it.
Know your financial numbers.
Take a good look at where you are currently spending your money and work out the numbers as a % of sales. This process will be considerably easier if you have an up to date P&L (profit and loss set of accounts). The reason you work out the % of sales for all your purchases is so that you can tackle the low hanging fruit 1st. That is the larger costs that if you reduced by 5-10% would have a major impact in your bottom line.
Depending on the business it usually takes €100,000 of (net)sales to generate €10,000 in profit. What if you could get that same €10,000 or an extra €10,000 by simply buying better?
Sales is a lot of work.
If you have been in business for a while you will know it takes a great deal of work to generate new sales. There is marketing activities and campaigns to work on. Then there is the conversion of the marketing activities into actual bookings. Next comes the delivery of the service and products.
Every business needs to focus on these key areas to generate sales and continue to grow. However, when we have not ensured that what we buy is the best deal available a lot of what we generate in top line sales never reaches the bottom line.
Sadly, the profit portion all too often is much smaller than it could and should be. What this article is about is making sure whatever your revenue is that you take as much money as possible to the bottom line.
So, let’s assume that you have the financial information on the main purchasing costs to your business. What do you do next?
Step one . The big purchases
First highlight the areas you can do nothing about. This could be where you are tied into a long-term lease or have a mortgage on the business that has an air tight contract. Now of course these can be negotiated but usually they are tied up in advance with many legal requirements. Then have the list of things that you can do something about right now.
Depending on your line of business COS (cost of Sales) otherwise called Purchases is usually the largest cost base followed by labour and energy. Labour is not purchasing but I will cover managing the labour cost in another article.
Step two: 80/20 it.
Now within purchases there are usually areas that you spend the most again so start with the biggest. For example, Meat is usually the largest spend for most Restaurants, Hotels and Gastro Pubs, followed by fish, followed by fruit and veg, then Dry goods and Dairy. Start with the one that you spend the most on.
Adopt the 80/20 rule on everything. I wont bore you with the history of the 80/20 rule, but its generally seen as 80% of money is usually spent on 20% of what you buy. It you are interested in the 80/20 rule look up the Pareto principle which is the original name for the 80/20 rule.
In the case of the hospitality industry, 80% of the money is usually spent on 20% of the products (the high-volume items) you purchase so focus on the 20% of things that will make the 80% impact. Each business is different so use your own financial information you have about your suppliers.
The next thing is to get your supply chain to do some work for you which is to produce a volume report for you. Ideally in an excel spreadsheet or some other useable format. The reason you want this information ideally in excel is that you can work out the total value of what you are spending with your current supplier. Then when you approach other suppliers you can also see what the total cost would be should you move. This makes it easier when you are negotiating pricing on key lines with current and future suppliers meaning the deal you put into place will be the most lucrative for you and your business. It also makes proper comparisons simpler.
The volume report should contain at least these items,
4 Volume of Units purchased
5 Unit Price- Specification Price and where applicable kg price
6 Total spent
I would suggest you ask for a 3-month volume report, that is everything you have bought over the last 3 months with the current price.
This course of action starts a number of ripples into effect.
- Your supplier will stand up and pay attention, in many cases prices reductions are imminent and price increases are pushed back.
- You will have a document that will assist you to work out what are the most important purchases and which ones will have the biggest impact on your profitability. Adopt the 80/20 rule here.
- The information can now be used to enter a tender process which makes it easier to have multiple suppliers vying for your business and you can ensure you have the best possible deal in place.
Before engaging with new suppliers follow my simple 6 step formula which I found very beneficial when I was the Stock, Quality and Purchasing manager for one of Ireland’s leading hotel chains the formula is as follows
RS+S+CT+RB+PTA+MC=WIN for your company
The Formula explained:
RS= Reputable supplier you need to be sure that you are dealing with someone whom is trustworthy (most businesses are) and have a track required of supplying high quality goods.
S =Service i.e. they can get what you need when you need it in an efficient and friendly manner, it amazes me how many delivery personals has lost companies large orders just by being rude to employees when delivering the orders.
CT= Credit Terms, when changing suppliers, it is imperative to get your current credit terms at least matched if not you will create a cash flow problem by paying 2 suppliers at the same time.There is another way to lessen the load when you can’t get credit terms matched you can agree a payment plan for your former suppliers meaning cashflow is not overly taxed
RB= Reciprocal business is your supplier capable of giving you business and how formal can that process be if you have 2 suppliers that are equal on price what is their commitment to you. That is can they guarantee you business. In the past, I could get some large conferences booked in the hotels and a host of large private Christmas parties along with meeting rooms and bed nights. If you don’t ask you don’t receive. The sales on these ranged from €1500-€75,000 per booking.
PTA=Price term agreement, you won’t have the time to watch costs every day so agree a timeframe for how long agreed pricing will hold, in other words that
There will be no increases during that period and of course, should markets change and priciest go down the knock-on effect will be expected meaning you can adjust your menu pricing when you need to. This ensures you are always profitable.
If all boxes have been ticked you can engage with a new supplier or keep with existing suppliers knowing you have the best deal you can get in place, I have yet to see where this process does not yield more money to the bottom line or stretch out for longer the deals that are working for you.
Step six (only applicable if you are spending large sums with a supplier)
MC= Marketing Contribution. This will only apply if you have a considerable volume of goods being purchased at least €100,000. When this is the case a contribution towards your marketing costs can be sought. After all you will be working to promote your business to sell your suppliers products. When you market, better and sell more you and your supplier win. I have seen clients get support in a host of ways from suppliers over the years. Again, if you don’t ask you don’t receive. You wont always get a contribution especially of you are not dealing with national suppliers. What I have found is even if you don’t get a marketing contribution you can get some extra value by asking.
Here’s my quick pitch – contact us and we will sort it with you. Click Here. Now back to the DIY method.
Once you have the volume information to hand it is now important to sort them into highest volume and value so you will know what products are the most important to your business the 80/20 rule is very important here spend your time on the 20% of products that you spend 80 % of your money on its not an exact science but the amount of times I have gone through this process with a client that it is proven is amazing and in many cases the 90/10 rule applies which is 10% of what you buy accounts for 90% of what you spend. By doing this you will know which products you need to take a hard line on and which ones don’t matter as much in the greater scheme of things.
Then approach alternative suppliers with the volume only information and inform them they have one chance at the business. Doing this should avoid the usual time wasting old chestnut,” if I am a little out on price won’t you let me know”
Only approach reputable suppliers this will avoid problems should you change supplier.
If the totals are far apart, that is the new pricing is miles better than what you have been paying perhaps it is time to change supplier as perhaps your deal has not been as good as it could or should have been.
Once you have all the figures in front of you, you can now make an informed decision taking all the variables into account. Enjoy the process of bringing more to your bottom line.
If you want to learn more on how to make sure you have the best deals in place and you bring as much to your bottom line as possible, book complimentary kick start session with us.
On this call, we will take roughly 15-20 minutes where you will leave a solid clear plan around the 12 month results you want to achieve and 3 key action items you need to complete to kick start more profit back into business within the next 90 days.