procurement and profits

What has PROCUREMENT got to do with PROFITS?

When asked about profits management will often act as though sales are the only solution. Don’t get me wrong sales are important but they aren’t the only solution especially not if we try to increase our revenue without understanding the cost of producing such revenue.

In the quest for competitive advantage Michael Porter pointed out three approaches that companies can take, that is, winning by being unique or different, focusing on a given niche and dominating it or leading in cost which is another way of saying cut the cost of production but maintain the market price. When it comes to cutting the cost one of the places we can apply this is in procurement after all remember there are 3 functions that help a business achieve its objective

• Operations
• Marketing
• Finance

Procurement fit right into the business operations.

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Procurement is:

All activities required in order to get the product from the supplier to its final destination. It encompasses the purchasing function, incoming inspection, and quality control and assurance, allowing companies to make supplier selection decisions based on total cost of ownership, rather than price. Van Weele (2009)

In the current economic set up we have three kinds of buyers with whom we negotiate and sell to (Learn more about negotiations):

1. Industrial buyers

These buyers procure so that they can meet their customers’ needs with tangible goods. They include primary sector, such as farmers, oil miners and secondary sectors which has the manufacturer e.g car makers, carpenters etc

2. Institutional buyers

This group procures to meet customers’ needs with intangible services. They are the tertiary sectors e.g banking, insurance etc, basically they offer services to end users

3. Intermediate buyers

They procure products for resale to industrial or end users, they include whole sellers, retailers etc

From this we can see that purchasing is a sub-activity in procurement

Procurement is an integral part of supply chain management function, focused on the management of the part of the upstream, supplier-focused supply chain. Chick and Handfield (2014)

CONCLUSION

The items purchased can be Raw Materials, semi-manufactured materials and components, finished products, packaging, capital items, services among others

Whatever the case these items are obviously intended to meet the business operation objectives and if not properly accounted for during purchasing or even poorly recorded then you can easily see how this will affect the cost of production either by misleading in cost or simply buying items we may not be in need of or even already have.

The effect will be simple, increase in cost of production will reduce gross profit and well its downhill from there. If such don’t affect cost of production then they increase other expenses in the organization and the effect is going to be felt in the income statement. Either way profits are affected.

So take care of your procurement or purchasing activities.

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