3 Deadly Purchasing Pitfalls to Avoid
When looking at the procure to pay process of a company, a lot of companies will focus on the payment side of the equation. Accounts payable and cash flow are both definitely important. However, purchasing is a critically relevant department that sometimes gets ignored as part of the bigger picture. Stemming off problems before purchases are made can be the most important difference you can make to improve your business.
Contract Problems Create Massive Pain
Arranging good terms with suppliers is hard work. You have to make sure your company is getting a good deal from a reliable source. More often than not, it means a contract that guarantees at least a set amount of purchases—sometimes only allowing your business to buy certain equipment from one specific vendor. Employees who make deals and buy inventory should be aware of this but that doesn’t manage to fully prevent rogue purchasing problems. Looking at purchases and finding unapproved vendors were used creates huge headaches across multiple departments, including finance and compliance. The buyer may have felt it was necessary at the time but that doesn’t make back-end reconciliation any easier or reduce potential liability.
One-Use Vendors: a Slippery Slope
One-time vendors are increasingly popular for corporate purchases. It definitely seems like a simple enough proposition. If you only need to grab something once, why go through the vendor creation process? In actuality, this can be a questionable system. Single use fill-in-the-blank purchases can ultimately create more significant problems when used heavily. There are many times where the need this vendor is going to fill doesn’t really become apparent until after the first purchases are made. Migrating a single purchase vendor into a “true” supplier, with an identifying number, purchasing agreement, and recurring use, can make a big back-end mess. Finance needs to be able to tie the original purchases together for accurate reporting and projection but most one-time vendor systems don’t lend themselves to easy research. It also erodes the purchasing contract system and efforts towards spend control. Temporary arrangements like these don’t often have the lowest cost or best option in mind. Relying on them increases the likelihood that another supplier’s contract could be violated.
Pricing and Inventory Management
One of the main goals of the purchasing department is to get guaranteed pricing and better deals. A lot of manual purchasing systems don’t lend themselves to transparency. For national and international businesses, this can mean significant pricing discrepancies across different regions. Inventory management is a particularly important concern for companies that need to create their product. Whether you’re assembling cars or packaging food for distributions, keeping good inventory levels is absolutely essential to continued success. Your purchasing system should be robust enough to keep track of what’s been ordered when you use an item catalog. Try and configure alerts that keep you aware of things nearing depletion and regularly scheduled re-orders.
Exercising diligence in purchasing management isn’t easy. Everyone has a different strategy for establishing purchasing policy but enforcement is critical to avoiding issues. Having one master vendor list across all departments and locations is an easy way to prevent contract violations through bad purchasing practices. Establishing an online purchase order system has given millions of companies the flexibility they need to manage their spend while keeping the business moving forward at a fast pace.