Purchasing is not “the people who execute requests”. It is the function responsible for making sure that the right item, to the right specification, at the right time, from the right source, at the right price arrives. Neglect any one of the five and it costs more than the price ever saved.
1 The effect of buying on profit
A company with sales of 10 million, purchases of 6 million and net profit of 500,000:
| Route | What it takes | Effect on profit |
|---|---|---|
| Save 5% on purchases | Negotiation, consolidation, alternatives | +300,000 |
| Grow sales at a 5% margin | Extra sales of 6,000,000 | +300,000 |
Result: saving 300,000 on buying is worth a 60% increase in sales. And yet in many businesses purchasing gets the least attention and the weakest people.
“Cheapest” is not “least expensive”
A pump at 50,000 that draws more power and breaks down twice a year, against one at 65,000 with a five-year warranty. The difference is 15,000 at purchase, and over five years the real difference favours the dearer one. Compare the total cost of ownership: price + running + maintenance + downtime + residual value.
2 Purchasing and sourcing are not synonyms
| Aspect | Transactional purchasing | Strategic sourcing |
|---|---|---|
| The question | How do we execute this request? | Where should we be buying from at all? |
| Horizon | The single order | One to three years |
| Output | A purchase order | A supplier base and framework agreements |
| Measure | Speed and accuracy | Savings delivered and risk reduced |
| Focus | The transaction | The spend category and its market |
3 Principles of the function
- Transparency: the criteria are published before offers are received, not after.
- Equal opportunity: the same information to every supplier at the same time.
- Segregation of duties: the requester, the buyer, the receiver and the payer are different people.
- Documentation: every award has a written justification that can be reviewed two years later.
- Conflict of interest: a written declaration from everyone involved in the decision.
- Multiple sources: no critical item should depend on a single supplier.
A single supplier is not always wrong
Concentrating on one supplier is sometimes the right call: a better price at volume, deeper integration, more consistent quality. What is wrong is for it to happen without a decision — discovering after ten years that 80% of your spend sits with one party because nobody noticed, not because anybody chose it.
4 Categories of purchase
| Category | Examples | What matters in it |
|---|---|---|
| Direct materials | Raw materials and goods for resale | Cost, quality and continuity of supply |
| Indirect materials | Stationery, cleaning, maintenance | Simplifying the process and cutting transaction cost |
| Services | Consulting, transport, technology | Scope of work and service levels |
| Capital assets | Machinery, vehicles, systems | Total cost of ownership and return |
Lesson summary
- What is saved on buying goes to profit in full, so it moves faster than selling does.
- Purchasing has five jobs: the item, the specification, the timing, the source and the price.
- Cheapest is not least expensive; the measure is total cost of ownership.
- Transactional purchasing is a transaction; strategic sourcing is a category-level decision.
- The principles: transparency, equal opportunity, segregation, documentation and declared conflicts.
- Relying on one supplier is acceptable by decision, never by neglect.
5 Test your understanding
Three quick questions
Pick the answer you believe is correct and you will see the result immediately.
1. A company buys 6 million a year at a 5% profit margin. Saving 5% on purchases is equivalent to:
A saving lands in profit in full, whereas only the margin of a sale ever does.
2. Two offers: a pump at 50,000 that breaks down often, and one at 65,000 with a five-year warranty. The sound choice rests on:
Running, maintenance and downtime can exceed the price difference several times over the asset’s life.
3. A business finds 80% of its spend sits with one supplier with no prior decision. The most accurate description:
Concentration is acceptable when it is a considered decision with a fallback, and unacceptable when it happens by neglect.