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Procurement cost analysis



We all know that it takes a lot of effort to purchase something, whenever tens of millions of dollars in goods, or small things in daily life. Today we will talk to you about the cost of procurement:

1. Purchase cost structure

Procurement costs are the sum of the costs incurred for all procurement activities. Specifically, it includes the sum of manpower, material resources and financial resources invested in various procurement links such as purchase, packaging, transportation, acceptance, and storage from external suppliers. Procurement costs include explicit costs and hidden costs. Explicit costs mainly refer to human capital such as order tracking, production plan implementation, shipment, acceptance, and supplier management in procurement management; hidden costs are mainly caused by quality costs and shortfalls. The cost of goods, etc., including non-conforming product disposal, after-sales service, downtime, returns, employee training, supplier evaluation, and other expenses related to procurement-related activities.

2. Main factors affecting procurement costs

(1) Supply chain bullwhip effect

The bullwhip effect is a well-known American supply chain management expert HauL. Lee's image description of the deviation and distortion of demand information transmission also called demand amplification effect. The overall idea of the "bullwhip effect" is that the information of each adjacent node department in the supply chain is not true, which will have a greater impact on the entire supply chain and produce a step-by-step amplification phenomenon. Lead to deviations in-demand information, which affects the company's procurement activities. The impact of the bullwhip effect on procurement costs is mainly due to the increase in procurement requirements, which will result in changes in the supplier's production plan, which will affect the supplier's delivery time and the transportation cost will be closely related to the order, thus increasing the transportation cost.

(2) Procurement budget

The procurement budget refers to the payment plan of the materials procurement prepared by the purchasing department during a certain planning period (annual, quarterly or monthly). Since the budget affects the allocation of resources, departments often exaggerate the budget when they are budgeting. In addition, any budget has uncertainties that can cause deviations in-demand information.

(3) Purchase batch

A large number of purchases is inherently attractive to suppliers, and large orders are bound to reduce supplier management and other costs compared to small orders. Therefore, suppliers often return purchasers by appropriately reducing the purchase price. Purchasing companies can obtain price discounts from suppliers through bulk purchases, thereby reducing procurement costs.

(4) Procurement process

The procurement process is an important part of the procurement cost management. The demand planning in the procurement process, the preparation of the procurement plan, the selection of suppliers, the business negotiation and the procurement contract are the pre-processing lead time of the procurement; the production, manufacturing, shipping, etc. are the procurement processing advance. The acceptance, warehousing, and settlement payments belong to the post-purchase processing lead time, which together constitute the procurement process. Whether the procurement process design is reasonable and efficient will directly affect the procurement efficiency and procurement cost.

(5) Delivery and payment terms

Delivery conditions, including the place of delivery, the method of transportation, the cost of packaging and handling, the batch of delivery, and the amount and method of payment are all important components of the terms of the procurement contract and will have a direct impact on the purchase price. The price of the product is relatively low under the complete delivery batch, reasonable delivery time and payment terms. In an emergency, the purchaser will increase the cost of the supplier in order to obtain the required goods in advance. Therefore, suppliers will raise prices appropriately.

(6) Supplier's choice

The supplier's choice has a direct impact on the procurement cost. The raw materials and spare parts provided by the supplier are crucial to the quality of the final product of the enterprise. If the supplier's product has a quality hazard, even if the company pays more than enough effort, the best product cannot be obtained. The cost of raw materials for suppliers is the most fundamental and direct factor affecting the purchase price. The existence of a company must pursue profits, and the production of any product is driven by interests. Therefore, the purchase price is generally higher than the cost price of the supplier, and the bottom price of the supplier is the cost price. The difference between the two is the profit of the supplier.

3. Principles of procurement management

Purchasing management plays an important role in the production and operation activities of enterprises. 60%-70% of the total cost of the enterprise comes from the procurement of raw materials, semi-finished products, and finished products. Procurement activities have become the link between the upstream supply chain and the downstream supply chain. The various aspects of procurement activities, including the efficiency of procurement, the execution of orders, and the degree of response and service of suppliers will have an impact on the needs of downstream customers. It plays an important role in the final quality of the product and the ultimate economic benefit of the enterprise.

The principle of procurement management is to purchase the right quantity of the right quality products at the right price through the right supplier and supply them to the right place at the right time.

(1) Choose the right supplier

Suppliers with reliable quality and good reputation are the guarantee of the final product quality. Establishing an equal and mutually beneficial trading relationship and forming long-term and stable cooperation is the prerequisite for ensuring the quality of purchased products.

(2) Appropriate quality

The products required for enterprise procurement have been based on the principle of quality. The pursuit of excessive-quality will inevitably lead to higher purchase prices. Conversely, lowering the standard will not meet the requirements for use, resulting in rework or non-conforming products, and increasing related costs.

(3) The right amount

The number of purchases should be appropriate. Excessive quantity will cause inventory to increase inventory costs, and even appear to be inactive. If the quantity is insufficient, the shortage will affect production. The increase in the number of purchases will increase the cost of operations.

(4) The right price

The purchase price should be based on the principle of fairness and reasonableness. If the purchase price is too high, it will increase the additional cost of the enterprise and reduce the competitiveness of the enterprise. Conversely, excessive pursuit of low prices will lead suppliers to cut corners, reduce service levels, and shoddy. A reasonable price is beneficial to both the supply and demand sides.

(5) The right time

The timing of the purchase and the delivery time should be reasonably calculated. The premature purchase will result in a backlog of products, and the inventory will lead to an increase in inventory costs. Conversely, a delay in the purchase point will result in a production stoppage that will affect the construction period and even cause significant losses.

(6) Suitable location

Appropriate location means that the purchased product should be in place as soon as possible, which is conducive to the use of production processes, avoiding the loss of product quality and secondary transportation costs caused by secondary transportation.

4. Procurement cost analysis

The basic process of procurement can be divided into the formulation of procurement plan, the occurrence of procurement behavior, the supervision of procurement process, the tracking of manufacturers' production, the delivery, inspection, product storage, storage and storage, delivery and distribution, supply and marketing settlement. The cost of procurement is the cost of the above procurement process. Some of the costs are visible, that is, the costs that are easier to analyze or can be directly derived from the financial statements; some are invisible, that is, difficult to analyze or easily overlooked, and the two types of costs are divided into " Explicit cost" and "Hidden cost."

Explicit cost

(1) Cost of procurement planning

Accurate procurement planning can accurately predict and master the production plan of the enterprise, which can enable the enterprise to minimize the occupation of procurement funds while meeting the production requirements of the products. At the same time, it must conduct a comprehensive analysis of the supply market and adjust the order plan. , evaluate and select suppliers. The preparation of the procurement plan can be said to be the primary part of the procurement process, and its expenditure is also called the procurement planning cost.

(2), The cost of raw materials, semi-finished products or finished products

The cost of raw materials, semi-finished products or finished products refers to the price at which the goods are purchased. There are many reasons for affecting the price of purchased materials, including commodity market prices, product quality, market supply and demand, and so on.

(3), Procurement management costs

The cost incurred in the procurement business process is the procurement management cost. It includes labor costs, tendering costs, construction costs, hospitality, office expenses, travel expenses, and more.

(4), Transportation costs

The transportation of purchased materials

Hidden cost

Implicit costs are relative to explicit costs. Implicit cost refers to a part of the cost that is not easily overlooked in the financial statements but is very important, such as:

(1) Time cost

The time cost due to a long time in response to customer demand.

(2), Out of stock costs

The out-of-stock cost refers to the loss caused by the failure of the inventory to be exhausted or the supply is interrupted. This part of the cost is not reflected in the financial statements, but once the shortage occurs, it will not only bring a lot of economic losses but also have a great impact on the reputation of the company.

(3), Inventory backlog cost

Relative to the out-of-stock cost, the inventory backlog cost is the cost of the backlog caused by too much inventory. The inventory backlog has significantly increased transportation and storage costs, and it also occupies the development funds of enterprises. At the same time, in the process of warehouse storage, there will be some losses caused by product damage caused by improper storage. Therefore, too much inventory is also not conducive to the development of enterprises.

(4) Other costs that are easily overlooked

The sum of explicit costs and hidden costs that occur in these procurement activities described above is called the total cost of ownership.

When pursuing the procurement business, we must proceed from the procurement cost of ownership, and at the same time, distinguish the procurement cost focus according to different materials, analyze the factors affecting the procurement cost, and develop targeted procurement plans and strategies to achieve the lowest procurement cost.

5. Factors affecting procurement costs

There are many factors influencing the total cost of enterprise procurement, which can be summarized as internal factors and external factors.

Internal factors of the company —

(1), Purchase batch and purchase quantity

The principle of supply and demand tells us that the unit price of purchased materials is inversely proportional to the quantity, that is, the more the quantity, the lower the price of the purchase. In reality, it is impossible for an enterprise to purchase too much material at a time because although this saves a part of the procurement cost, the backlog of inventory and the cost of consuming the funds used for development by the enterprise are far more than the cost saved. Therefore, the purchase batch and purchase volume can affect the purchase cost of the enterprise.

(2), Delivery date, delivery location and payment period

Although the price cost of purchased materials accounts for a large part of the total cost of procurement, factors such as the supplier's delivery date, delivery location, and payment period also affect the size of the enterprise's inventory and the cost of procurement. If any of the conditions mentioned above cannot satisfy the normal production and operation of the enterprise, the lower price will not be able to satisfy the perfect completion of the procurement business. Therefore, factors such as the supplier's delivery date, delivery location, and payment period are also an important factor affecting procurement costs.

(3) Communication and collaboration between departments

The implementation of the procurement business is not only the responsibility of the procurement department but also involves the planning, design, production, sales, and quality inspection departments. Therefore, this requires good communication and collaboration between various departments of the enterprise to complete this business perfectly. If the planning department's material demand plan is not accurate, the production plan will change accordingly. Once the change is frequent, the emergency procurement will increase, and the procurement cost will be high. If the design department does not conduct value engineering analysis, it only considers the aesthetics of the design. With the uniqueness, it will lead to large differences in material categories, and it will not form the purchased quantity, which will not form the price advantage given by the supplier; it may also be because the quality inspection department has too strict quality standards for the purchased materials, and the procurement department Suppliers' choices will also be very cautious, ultimately leading to increased procurement costs.

(4), Price cost analysis and negotiation ability

The analysis of the cost and price composition of the supplier's products is the basis for determining the purchase price and obtaining the initiative to negotiate with the supplier. The procurement department must thoroughly investigate and analyze the current situation in the market before implementing procurement negotiations. In this way, different and effective negotiation and bargaining methods can be selected for different suppliers to ultimately achieve the purpose of reducing the purchase price.

- External factors -

(1) Market supply and demand situation

Market supply and demand conditions directly affect procurement costs. When there is a shortage of market resources and the supply of goods is in short supply, suppliers will increase their prices. On the contrary, if they are an oversupply, they will choose to cut prices.

(2) Supplier's production capacity and technical level

If the supplier's production capacity is strong, production technology is advanced, and product quality is good, the product sales price will generally be relatively high. Therefore, the procurement department should scientifically and reasonably select suitable suppliers according to the requirements of the company's product technology functions, quality and delivery time, and strive to achieve good cost performance.

(3), Supplier cost

When the company is in the stage of new product development and investment, the number of purchases will be relatively small, and the cost of suppliers will generally be higher. After entering the growth period, as the purchase volume increases and the technology matures, the supplier cost will decrease. Product supply prices will drop.

(4), The supplier's marketing strategy

The supplier's sales strategy and its quotation method directly affect the procurement cost. If the supplier initially orders the price to open up the market and the price is relatively low, the price will increase after occupying a certain market.

(5), The relationship between the company and the supplier

Under the background of economic globalization, if the supply and demand sides can establish a long-term cooperative partnership, through joint efforts, the procurement cost can be reduced to achieve a win-win goal.

6. Procurement cost control strategy based on total cost of ownership

(1) Build and improve the procurement system

The basic work of procurement cost control is to establish and improve the procurement system. Before implementing the procurement business activities, it is necessary to do the most basic work - the procurement system is necessary, which is the premise for enterprises to effectively control the procurement costs.

(2) The transformation of traditional purchasing concepts

Enterprises must follow the principle of “the lowest cost of ownership”, not only paying attention to explicit costs but also paying attention to the hidden costs of “invisible”. Purchasing business conduct should be based on the principle of “lowest total cost” and not just the pursuit of “lowest purchase price”. Companies must change the traditional concept of such procurement, have the vision to control the overall cost, and be able to assess the key cost links involved in the procurement process and other related long-term potential costs. In this way, it is possible to save procurement costs from the various links, the details, and the total cost. A correct purchasing concept is the primary key factor in determining whether a company can scientifically and reasonably conduct procurement cost control. The control of procurement cost is not only the matter of the procurement department, but it also bears the responsibility of comprehensive cost management, which in turn affects the subsequent research and development, production, sales, and other aspects.

(3) Establish a strict procurement system

In view of the corrupt behaviors such as “suckbacks” by some procurement personnel and the prevention of corruption, enterprises should establish a strict and perfect procurement system. This will not only prevent the purchase of bad behaviors such as corruption, but also regulate the company's procurement business behavior, optimize the process, and thus improve procurement efficiency. The procurement system should be developed according to the classification of the products that the enterprise needs to purchase. Different product items stipulate the type of application for material procurement, the approval of the licensee, the method of raw material procurement, and the final approval. It is also necessary to clarify the responsibilities and relationships of the relevant departments, and must not be operated in a level-by-step manner, resulting in confusion of the final process and irrelevance of powers and responsibilities. Of course, whether the procurement system can be smoothly implemented depends on the quality of the entire procurement team. The professional quality and professional ethics of the procurement personnel will be the key factors affecting the stability and efficiency of the procurement activities of the enterprise.

(4) Reasonable formulation of the procurement plan

The prerequisite for a scientific and rational procurement plan is to understand the specific requirements of the demand department and the supply information of the materials. The procurement business activities are in the position of production service from beginning to end. The material procurement plan is mainly based on the specific requirements of the production plant and is based on the actual situation of the production demand department, rather than arbitrary procurement. At the same time, we must consider a series of factors such as the fluctuation possibility of the supply market and the inventory cost, and finally obtain a reasonable and scientific procurement time, procurement batch, order cycle, and delivery method, and prepare a scientific and executable procurement plan.


7. Supply Positioning Model Purchasing Cost Control

The supply positioning model is to classify the purchased products from the two aspects of the number of products purchased by the enterprise and its impact on the enterprise, supply risks, and opportunities. It is the enterprise procurement in determining the demand, obtaining and selecting the quotation, and supplying. An analytical tool that serves as a guiding role in activities such as business evaluation. The supply positioning model divides the products that the enterprise wants to purchase into four broad categories: daily, bottleneck, leverage, and key.

(1). Daily class - supply management

The procurement of daily products is a low-value purchase, and the opportunities, risks, and impacts are relatively low. Therefore, the cost of purchasing such products based on the total cost of ownership lies in the procurement management costs in explicit costs. Purchasing management costs include many aspects: supplier management costs, labor costs, information costs, office expenses, and other costs. Therefore, our main consideration here is to reduce the cost of supplier management and adopt some cost control strategies for the characteristics of daily products.

(2). Bottlenecks - risk control

Bottleneck product purchases are low-value purchases, but their opportunities, risks, and impacts are relatively high. The occurrence of risk means an increase in costs, which are hidden costs that we cannot see on so-called statements. Therefore, the focus of procurement cost control for such products is to control the occurrence of risks and minimize supply risks.

(3). Leverage - price management

The level of purchases of leveraged products is high, and the opportunities, risks, and impacts are unlikely to occur. The key to the cost control of such products is the change in product prices. In order to minimize the procurement cost of such products, we should focus on the market supply price, and reduce the total cost of procurement ownership by reducing the price and delivery cost.

(4). Key categories - quality management

The procurement of key products is high-value procurement, and the opportunities, risks, and impacts are likely to occur, and the level of purchases and expenditures is also high. At this point, our focus is on the quality and continuity of the products supplied. Once there is a problem with the key element of quality, not only is the cost of procurement increased, but it will also bring irreparable damage to the company. The cost of quality problem risk is hidden cost, we can't predict when it will happen and how much loss, so early prevention will be a good preventive measure.

8. Procurement cost control method

The current popular procurement cost control methods include supplier quantity decision, procurement authorization, VA/VE value analysis method/value engineering method, four-quadrant classification method, and procurement standardization. This article focuses on the four-quadrant classification and procurement standardization.

Four quadrant classification

Dividing purchased products into different types and adopting different procurement strategies in a targeted manner is a basic prerequisite for reducing procurement costs. The four-quadrant classification method divides the procurement materials into four categories according to the importance of purchasing materials to enterprises and the factors affecting procurement costs.

(1). Bidding procurement

Such materials have a high degree of importance to the production of enterprises and have a great impact on procurement costs. Enterprises should try to balance the price and non-price factors and avoid the waste of resources caused by information asymmetry transactions. Enterprises through the bidding procurement to create a healthy competition between different suppliers, thereby improving the deficiencies in the procurement business, allowing enterprises to have greater autonomy. Purchasing according to the principle of highest cost performance and best service guarantees the high quality of the production and can greatly reduce the procurement cost.

(2). Strategic inventory

The procurement of such materials is generally not costly, and the quantity of purchases is relatively small, but it is an auxiliary material that will have a direct impact on the production of the enterprise. When enterprises purchase such materials, it is considered whether they can ensure the smooth progress of their production and operation activities and the quality of the final products in a timely manner. The procurement of such materials is the primary goal of maintaining sufficient inventory, and the price is only a reference condition. By determining the frequency of purchase and the quantity of purchase through inventory control, unnecessary waste can be reduced, and the production and operation of the enterprise can be ensured smoothly.

(3). Reverse auction

For the procurement of such materials, price is the most critical consideration. Its impact on procurement costs is much greater than the impact on the company's production and operation. Reverse auction refers to the company's announcement of the highest price it expects on the network, and then the supplier bids according to its own conditions. The price quoted by the supplier must be lower than the highest price of the company or the lowest price that the current supplier can give. Finally, the company selects and evaluates the supplier of the bid.

(4) Fixed purchase

Such materials are generally sporadic materials such as office supplies, and have no impact on the production and operation costs of enterprises. However, it is often the procurement and management of such sporadic materials that cost the purchasing department a lot of manpower and material resources, so the management cost will increase if it is counted. Therefore, the procurement department will delegate the procurement tasks to the various departments in need, and adopt the method of fixed-point procurement to meet the different needs of each department. Finally, it is only necessary to settle and pay for the purchase payment after a specified period.

In the actual procurement business, the process involves many aspects, it is very complicated, and the difficulties encountered are also various. Enterprises should flexibly implement and carry out procurement cost control strategies according to their own capabilities and actual conditions.

9. Procurement standardization

Procurement standardization refers to the size, performance, quality, safety standards, technical requirements, standard methods of testing, codes indicating acceptable or recommended use, installation, operation, and maintenance methods. Internal standardization can enable the company to reduce the manpower, material resources and time required to open a thin list, allowing companies to purchase fewer varieties in large quantities, and thus achieve better-negotiated prices with a few suppliers, and the quality level will be improved. All in all, internal standardization is effective in both the hidden cost and the explicit cost. It is a good procurement cost control method for enterprises to choose from.

If enterprises want to reduce the procurement cost, they should carefully analyze the influencing factors of procurement cost, choose the procurement cost control strategy and method suitable for the enterprise, and reduce the total cost of procurement from the total cost of ownership.



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