Fred Pieplow

Top 10 Purchasing Mistakes Small Companies Make

 

“All decisions are emotional”, says Jeff Thull of the P.R.I.M.E Resource group.  We only do as much research as we need to do to justify the decision we already made.  This leads to BAD decision making!  To totally remove emotions from the process is not practical, but to increase objectivity in decision making is a valid goal.

Many companies do not have formal purchasing guidelines for their staff to follow in purchasing the goods and services they buy.  As a result, in some areas they do a rigorous job of analyzing their purchases and in other areas, they may be taken advantage of by their vendors.  The decision of what company to purchase from is often complex and can cross several responsibility boundaries within a company’s structure.

Here are the 10 most frequent mistakes made by companies when purchasing items big and small for their business.

  1. Not developing a written specification for vendors to bid on

This does not need to be a complicated document written by a Harvard attorney.  It does need to state your goals, the functionality of what you are purchasing, any terms you need, when you want responses back by, and the format you want the responses to be in.  Hold vendors accountable to your format, timing, content, and functionality.

  1. No objective for the purchase

Use words to describe what you are trying to accomplish, not what you want to buy!  One company desperately needed a new phone system but could not increase their monthly obligations for telephone related items.  They developed a specification package for both phone and data line charges and the equipment needs and told the bidders they could not incur any added cost over their current phone and data charges.  The bids came back with new configurations for the phone and data lines and a new phone system with only a 2 percent increase over the current cost of just the old phone and data lines.  Don’t assume that a vendor cannot do something until you ask if they can!

  1. Extreme loyalty to incumbent vendor

Developing a long-term relationship with your vendors is an admirable goal, but the responsibility for achieving that goal primarily belongs to the vendor.  Vendors need to earn your business and should not be offended when you go out for bids on their areas of supply.  The bidding process should be fair and protect any trade secrets the vendor may have imparted to the purchaser while delivering their value added.  Because it costs money and there is a risk associated with changing vendors, it is perfectly OK to allow the incumbent’s bid to be 5% higher than the next lowest, and still retain the business. Certainly, a tie goes to the incumbent, and they keep the business.  Just as in boxing, you have to beat the champ to be crowned the new champ!

  1. If it isn’t broken, don’t fix it

This tired old adage is responsible for many unnecessary costs in a business.  You have been purchasing an item from a vendor forever, and their service is good. They are reliable, and it is a small item, so just leave it alone.  Well, guess what?  Things change, and vendors often do not make changes that favor their clients.  Sometimes vendors will add a new, less featured service that would work fine for you, but will not tell you about it because it would reduce their revenue.  Sometimes certain cost items should get removed, but don’t.  Sometimes technologies change and the vendors do not always offer the new more featured products to their current customers.  Even if you do not go out for bid, ask every vendor, every year, if they have anything new you should be considering.

  1. Not checking the freight

Freight charges can often be negotiated like any other cost.  In this time of rising fuel costs, vendors often add fuel surcharges where freight has already been negotiated.  This amounts to a price increase and should be negotiated, not just accepted.  Be practical here. Someone needs to pay these added costs, and it may not be fair to expect the vendor to absorb them.  If there is a surcharge though, it is totally appropriate for the purchaser to ask how it is calculated, to verify the math, and to make sure it goes away if the price of fuel drops again (just wishful thinking on my part!).

  1. Not developing an objective decision making criteria before reviewing responses

Spreadsheets are great for developing a side by side comparison of vendor responses. You should use your requirements from the specification to create the list of information needed for comparison.  You can also use a vendor’s response to create the spreadsheet, and match all other responses to their format, but this does give an advantage to the vendor used to create the format.

You do not have to be rude, but you do need to be persistent.  Vendors do not like this process and may resist your efforts to standardize their response.  Be firm, and ask for data until you get what you need.  Do check references if you are serious about a new vendor.  Read the vendor’s terms and conditions. There can be some real surprises in the fine print and they will change the standard terms to get your business, but be sure it is in writing from a person with the authority to make an exception.  Be sure to document all issues discussed with each vendor and use this record to be sure vendors give you all the information you requested.

  1. Making an emotional decision

Early in a purchasing effort you may tend to start liking one sales team or product more than others.  This is natural, but dangerous.  You must avoid giving vendors you like a pass on certain items just because you like them.  There is time to be friendly later, after they have earned your business.

  1. Making decisions based on the vendor’s schedule

Take advantage of signing deadlines that work for you. Do not hesitate to ask for extensions!  Some vendors will come in just before a deadline, or a few days before the end of the month, and have a fabulous deal with the catch that you need to sign up before you have done all your homework.  Be very careful here.  Good deals sometimes happen, but often there are gotchas that far outweigh the savings implied.  Also, if other vendors have put in effort to meet your terms, do not pull the rug out from under them.  This is very unfair to them, and you may never get them to bid on your business again.

  1. Making decisions based on the vendor’s schedule

Vendor contracts often renew automatically unless you notify them by a specific date, usually 60 or 90 days prior to the end of the agreement.  This results in many automatic renewals for the vendor at prices that are not competitively negotiated.  Set up a process to review every contract every 3 years and stagger the reviews to spread the work out evenly.  Get the person responsible for supervising the vendor involved in the contract review.  Be sure to set this schedule up by notice date and to notify vendors on a timely basis.  This leads to an orderly review process that keeps your costs in line, and probably more importantly, keeps your service levels up to date with the best available in the market.

  1. Not holding vendors accountable to what they quoted

Vendors often throw in surcharges and other costs that were not mentioned in the bidding process.  Be sure your purchase order and their final bid are thorough and do not allow any other charges except for required taxes to be paid.  Your purchase order is the last and most official document in the chain of communications between you and the vendor.  Be sure to use it to repeat all the key terms and conditions related to this purchase.

Managing your vendors is a lot of work, and you may feel that your vendors do not require this level of scrutiny, but trust me, they do.  This is not as much work as it first seems, and could save your company substantial sums of money while assuring the company a high level of service and support.

 

Article written by :
Fred Pieplow
Fred Pieplow is a business strategist who uses his talent for asking highly impactful questions to help businesses understand how each decision impacts their cash, the lifeblood of their company. He is passionate about uncovering hidden opportunities that create explosive business growth. In 2009 Fred was named a "Michigan Entrepreneur of Distinction" by Corp! Magazine. www.MannaManagement.biz.
Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *