Every business only survives if it grows, and stagnant business eventually becomes a failed business. There are several ways in which an organization can grow and increase profitability: increasing revenue, optimizing processes, and reducing costs. Let’s talk about the effectiveness of these directions.
The daily mantra of the Sales department is the phrases “search for new customers”, “increase sales”, “increase market share”. However, selling in a mature market and fierce competition is not easy. This line of growth requires spending on additional sales staff: hiring, retaining, motivating, and training.
Another limiting factor for growth may be the capacity of the company (both production and human resources, their quantity and qualifications). And if a company decides to increase them, it usually requires significant financial and time investment.
The Procurement department is not mentioned so often when it comes to increasing profitability. And that is a mistake. Traditionally, employees are simply required to deliver the right product on time. However, this division has a much higher potential for contributing to the efficiency of the company. The following areas of improvement can be mentioned:
• getting the best price (tenders);
• optimization of company processes (from the regulation of internal application to receipt and approval of invoices);
• search for new suppliers;
• valuation of suppliers (amount of defects, delays, other errors, promptness of communication, etc.);
• procurement analysis.
The first task of the purchasing department, when contributing to the profitability of a company, is to negotiate the lowest possible purchase prices. However, once the optimal for both sides price level has been reached, it becomes clear that action in other procurement spheres is needed.
The impact of procurement process optimization on a company’s profitability is difficult to measure, but it has a significant effect on its performance. It saves time not only for the procurement department but also for the “internal customers”, the accounting department, and other employees.
The time resources are also important when searching for new suppliers. If a procurement department employee spends a working day merely sending inquiries to existing suppliers and verifying and approving the invoices received from them, the company loses opportunities for saving on alternative suppliers.
Procurement analysis also takes time, but it helps to draw conclusions and make decisions that save the company’s money.
If a company decides to increase profitability by optimizing its procurement, it will require fewer resources than when trying to increase sales. Businesses that, for one reason or another, have low margins (competition, market parameters, state restrictions) need to sell significantly more to increase their profit margins noticeably. In the meantime, optimizing procurement activities results in a much lower cost.
Let’s look at an example – a manufacturing company with an annual income of EUR 20,000,000:
If we lower the variable (purchase) costs by 10%, with the same sales, the profit would increase by 65% or EUR 780,000:
Sales in this company should be increased by 65% to generate the same profit.
In conclusion, we can affirm that the procurement department is crucial to increasing the profitability of a business, so its efficient operation must be one of the top priorities of the company’s executives.