Purchase Best Practices for Manufacturing Companies
Purchase or Procurement expenses comprise a sizeable chunk – sometime even up to 60% of all manufacturing company expenses. The cost of materials is market driven and manufacturing companies have minimum control over the same. Profitability of a manufacturing company therefore depends on having efficient & effective purchase practices. Implementing Purchase Best Practices is the way forward to achieve smooth-running purchasing process that focuses on cost efficient purchasing.
What are Purchase Best Practices?
Purchase best practices are a set of strategies that hep manufacturing companies optimize their purchasing processes to ensure timely procurement at the most cost-effective prices.
Implementing purchase best practices, ensures a streamlined procurement process, helps make informed decisions about purchases, optimize resource allocation, improve efficiency, reduce cost and increase profitability.
Purchase Best Practices comprises various activities from conducting research before purchasing to performance monitoring. In this article, we will cover each one of them in details.
Clear Understanding of purchase requirement:
Purchase team must have a good understanding of the materials required, size, make specifications, etc. This helps purchase team look for suppliers offering the best quality materials that match the specified requirements and within the budget.
Conduct Thorough Research Before Purchasing:
Purchase Team must carry out research to learn which suppliers offer requisite products, at what prices etc. They must evaluate quality of goods, compare prices, delivery timelines, cross check prior performance of suppliers to judge their reliability & trust worthiness. This will ensuring chosen suppliers will meet the quality standards and delivery timelines.
Centralize Purchasing:
If different teams or locations of a manufacturing company place their own orders, they cannot avail the benefits of bulk purchases. Consolidating the purchases across departments & locations will help to set up standard procedures for purchases, eliminate duplicate efforts for purchasing same items. Purchase team will have more command in negotiating better deals because of higher purchase volumes, and can ensure cost savings.
Build Strong Relationships with Suppliers:
Good Supplier relations is at the foundation of a well-oiled purchase process. Communicating requirements clearly & precisely, having transparent & open communication, builds trust and develops long terms relations with suppliers. This leads to significant benefits like assured product quality, better pricing, reliable & timely deliveries.
Tracking and Monitoring Purchase:
Monitoring & tracking is the first step towards performance improvement. Setting up tracking & monitoring will improve visibility in purchase process. Manufacturing companies can keep a track of purchase order status, check delivery schedules against commitments. They can monitor whether up to date records of all procurement activities are maintained or not etc. This can help identify problem areas, bottlenecks and improve process with relevant changes to increase efficiency.
Manage Inventory Effectively:
Purchasing team is responsible to provide right materials at right time and ensure smooth production and strives to avoid situation of stockouts or overstocking. To achieve this objective, it is imperative to have a good inventory management practice in place. Thus you can define reorder levels & reorder points, set up alerts & notifications for timely procurement. Implementing good material management system enables to have real-time inventory data, proper demand planning, forecasting based on trends etc.
Implement Purchase Budget:
Defining specific budget for purchases establishes accountability of purchase team. It ensures that companies can ensure purchases are based on priorities, avoid last minute purchases which may turn out to be expensive, control overall purchase spend, develop culture of managing expenses in cost effective manner.
Monitor Purchase Performance:
Defining Key performance indicators (KPIs) is the perfect way to measure the overall purchase performance of a manufacturing company. Some important KPIs to monitor are Purchase Order Cycle Time, Average Cost of Processing a Purchase Order, Number of vendors, On Time delivery, Products Quality, Supplier Ratings, Cost Reduction, Cost avoidance, etc. Keeping a close watch on these metrics and regular monitoring & will help to compare monthly, quarterly performance and identify areas of improvement to take corrective measures.
Continuously Improve Purchase Processes:
Continuous improvement is essential for a competitive edge. Continuous interactions with purchase team, feedback and ideas for improvement will motivate them to perform better. With KPIs you can benchmark the present performance of your purchase department. Based on this you can define parameters for continuous improvement. For E.g. reduce purchase order cycle time from 7 days to 3 days, increase no. of suppliers, achieve 10% cost reduction by a specific deadline. Implementing ERP solution to automate purchase processes will help achieve continuous improvement.
How ERP Software Helps Implement Purchase Best Practices?
ERP software plays a significant role in implementing purchase best practices effortlessly for manufacturing companies. Here is how it becomes easier with ERP:
ERP systems provide real-time, digital data in single central repository. Thus, accurate inventory information across locations is available. ERP streamlines & automates lot of time-consuming processes. It provides real-time visibility to track purchases, helps identify areas causing delays, etc.
ERP enables implementing company-wide policies for centralized purchasing, purchase budgets & set up management by exceptions for better management. ERP helps define & monitor KPIs regularly and provides detailed reports for monitoring purchase costs, time, quality, suppliers rating etc. This enables data backed decisions for continuous improvement in purchase processes.
What are the benefits of implementing Purchase Best Practices?
Implementing purchase best practices will help purchase department have a clear understanding of policies, procedures, purchase requirements. This will result in a happier purchase team as it will save their time & effort spent on redundant activities. Additional benefits at company level are:.
- Streamline purchase processes
- Increase visibility of purchase process
- Gain better control over purchasing activities
- Central purchasing provides better negotiation power
- Improves supplier relationships
- Ensures cost savings & improves profitability
Summary
Adopting purchase best practices is inevitable for manufacturing companies to optimize purchasing processes, reduce costs, improve operational efficiency. This will help companies achieve their overall business objectives of staying competitive, growing sustainably, and ensure long-term success.
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