Published August 1, 1998

Reducing Operating Expenses: Company Purchasing Procedures

One way to combat the effects of a business recession is to work harder by producing and selling more goods and services. That's fine, and it's certainly important to maximize every business opportunity during a slump. But when a company fills more orders and generates more sales volume, very few of those gross dollars come down to the bottom line where you need them.

Recently, for example, the average supermarket had to sell $100 worth of groceries to make 86 cents in net income! Profitability figures vary from industry to industry, of course, but most businesses are lucky to bring 5 cents on the dollar down to the bottom line.

In contrast, when you save money by reducing operating expenses, 100 percent of those dollars go directly down to the net profit line. Look at it this way. Your best salesman might knock himself out for months to bring in an additional $100,000 in sales. At a 5 percent net profit, those extra sales will bring $5,000 to the bottom line. But by managing operating costs more effectively, many businesses can easily realize a similar gain in profitability.

It's not unusual for a company to spend, say, $50,000 a year on supplies. But it's much easier to reduce these expenses 10 percent through more effective management, than it is to generate $100,000 in new sales through elbow grease and shoe leather.

One of the surest ways to reduce operating costs is for the boss to personally control expenses. If upper management approves expenses, then the manager or owner can take responsibility for what's happening in his department. How many times have you come across questionable expenditures after the fact? By then it's too late.

Take a close look at your company's purchasing procedures. Are you working from a purchase order system? Can just anybody place orders? Or must they be approved in a systematic manner before supplies are requisitioned?

A commercial glass installer learned this lesson the hard way. The company had 15 different locations, and each office was individually responsible for ordering pens, pencils, paper and other office supplies. Every month they were placing orders for six to seven thousand different supply items, all various grades and prices, and the waste was enormous. The attitude at the branch office was, "If I need something, I'll just pick it out of the catalog, regardless of price, or quality or quantity."

Top management finally sat down with the firm's chief supplier and together they hammered out a standard supply order form that offered one choice for each category. Suddenly, expenditures for cases of $2.49 felt tip pens stopped. When branch offices ordered pens, they received 29- cent ball points.