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Friday, 1 August 2014

Friday Guest Blog: Where did all our profit go?

By Greg Jackson - Training and Innovation Manager, SR Supply Chain Consultants Ltd

Regardless of the size of the organisation, the question of why we haven’t realised the profit we expected is worryingly all too familiar. It is particularly worrying as the answer is usually fairly simple, and over and over again it is because organisations fail to understand the concept of cost.

As a procurement training and consultancy firm, one of the first questions we ask is for an organisation to differentiate between price and cost.  Some look confused, some start confidently and slow as they realise they have described the same thing and others give the clear correct description:

Price – is the amount we pay for goods or the provision of a service to a supplier.

Cost – are all the associated sums that are required to enable the successful implementation or use of those goods or services.

As companies we are obsessed with the price of goods, constantly asking to “get it cheaper” or for the explanation of “why can our competitors get it so much cheaper than us?” Sometimes these are valid questions, and by utilising our resources we may be able to reduce down these prices. However, I have yet to work with a company and to find that they were not guilty of getting so tangled up in the price that they fail to realise the competition maybe buying better than them; but it might have nothing to do with the price they are paying.

A simple but powerful example of these costs is that of raising purchase orders.  Every time I see this price in the media it seems to get more inflated, with a recent survey quoting upwards of £200 per order, however this does seem extreme. From my experience it is much more likely to be between £30-£50.  Even at these prices, the implications could be significant.  Even at £30 a company with a margin aspiration of 10% would need to achieve sales of £300 for every purchase order just to cover its cost!  How many purchase orders did your company send last year?  By reducing the amount by 10% how much additional profit could have been achieved? If the value is high maybe it would be worth looking at purchasing cards or the use of e-catalogues for some of your lower spends items.  Even if the price is a little more, maybe the costs are more important.

Purchase orders aside there are hundreds of processes, procedures and transactions that go on within every company, all taking time, costing money and eating away at our profits.

If we manage our costs, though more efficient procurement policies and procedures taking firm control of what we spend in an organisation the savings can be game changing, allowing us realise our profit potential.

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