Most of the available advice on procurement is aimed at large companies with hundreds of employees. While there might be some pieces that are helpful, most of that advice pertains to systems and issues that don’t arise in medium sized companies.
If your business isn’t too big or too small, your company is just right for the advice we’re about to share. Today’s episode will feature the down to earth, practical tactics that will instantly make a big difference in medium sized companies. We can’t cover everything, but we’ve assembled the bare minimum you need to know when it comes to purchasing at your company.
On this episode you’ll hear:
- The primary importance of purchase orders
- How to improve communication across your company
- Ways to use your budgets to your advantage
- The four eyes of procurement
- The importance of basic negotiating skills
If you’re a medium sized company looking for ways to improve the purchasing at your company then this is one episode you won’t want to miss.
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Transcription of This Episode
The Gross Profit Podcast is your one-stop shop on the path to profitability. Each week we share authentic advice on the positive practical steps you can take to make the company you love more profitable. If you’re looking for a positive plan to help you avoid common spending mistakes, control costs, and increase your profits, then this is the place for you.
I’m Ryan Cowden and this week we’re joined by James Kennedy and Richard Greenane. In this episode of the Gross Profit Podcast, James and Richard discuss the five things every medium-sized company needs to understand about procurement. Most of the available advice on procurement is aimed at large companies with hundreds of employees. While there might be some pieces that are helpful, most of that advice pertains to systems and issues that don’t arise in medium-sized companies. If your business isn’t too big or too small, your company is just right for the advice we’re about to share.
Today’s episode will feature the down to earth practical tactics that will instantly make a big difference in medium-sized companies. We can’t cover everything, but we’ve assembled the bare minimum you need to know when it comes to purchasing at your company. On this episode, you’ll hear the primary importance of purchase orders. If you aren’t already creating purchase orders for your suppliers, then this is where you need to start and we’ll show you how.
Next we’ll talk about how to improve communication across your company. By clarifying your purchasing rules, writing them down, and sharing them with everyone, you can prevent a lot of problems before they start. Then we’ll share some ways to use your budgets to your advantage. Budgets can be used to set limits on spending, but you can also set them up simply to see where your money is going.
After that, we’ll discuss the four eyes of procurement. You need two pairs of eyes or four eyes total checking every purchase order to cut down on mistakes and fraud. And finally, we’ll cover the importance of basic negotiating skills by providing all your employees’ training on the basics of negotiation. You can save your company a lot of money. If you’re a medium size company looking for ways to improve the purchasing at your company, then this is one episode you won’t want to miss. There’s a lot of actionable advice in this episode, so grab something to write with because you’re going to want to take notes. As always, I’ll be back on the other side to wrap up any loose ends, so without any further ado, here’s our conversation with James and Richard.
So welcome to another episode of the Gross Profit Podcast. I am your host, James Kennedy, CEO of www.procurementexpress.com. I am joined today by my co-founder and CEO, Rich. Rich, how are you?
I’m very well, thank you.
Now you and I invest a lot of time and effort in a very fancy procurement course over the course of last year. Isn’t that right?
That is, yes.
We went in, we learnt, we hung out with our fellow procurement professionals and a lot of it is useful for bigger companies. It’s fair to say there’s a good few government employees in our cohort or in our class of construction companies, some bigger construction companies. But in this podcast we’re going to talk about some more down to earth tactical approaches you can use in a medium-sized company. So a lot of the procurement material that’s out there is aimed at larger businesses.
But there’s plenty of small or medium size businesses that should perhaps look at how they’re doing their purchasing and we’ve just got the very least, basically the very least in medium-sized companies should know that when it comes to purchasing five things that you can implement today to immediately add to your bottom line. Do you think that’s accurate, Rich?
I do. Yeah. I think there’s a lot of things that companies that have 20 staff plus, they’re all buying things can do to really help them sort out their purchasing.
Yeah, that’s a good point there actually. I don’t think you really need to worry too much unless you have 20 staff or more. Right? Unless you’re really distributed. But if you don’t have this stuff like, like what’s right for a five-man company is not right for a 20 versus 200 and I guess there’s lots of advice out there about the 200-person company and the five-man company maybe can actually just hold it together by having one person paying all the bills. But it’s the Goldilocks zone there in the middle that there’s not a lot of advice for.
That’s right.
Okay. So I’m happy to share with the world, and Rich got a higher grade than me in this procurement course. So for that reason I’m going to ask him the questions and he’s going to be giving us the answers. So Rich, what’s the first thing that a medium-sized company can do to improve how they’re purchasing?
Well, first of all, they can create a purchase order, right? I mean that’s the first thing. Creating a purchase order writes down exactly what you’re going to spend and who you’re going to spend it with. And obviously, well not obviously, but when you create a purchase order and it’s approved by a supplier, then that’s a legally binding document between you and the supplier in most jurisdictions that I’ve ever seen.
So that would be the first thing. Don’t pay anything without having a PO. So have a purchase order, give it to the supplier and the supplier should then give you an invoice which matches the purchase order in its entirety and also has the purchase order number on it and you shouldn’t be paying any invoice unless it’s got that purchase order assigned because that makes sure that everything’s approved.
That is an incredibly self-serving answer there. Just so happens that we have an awesome purchase order software system. So right out of the gate, self-promotion, I’m all for it. But you’re dead right? I mean it’s such a simple thing. The reason people don’t use POs is because they don’t think it’s relevant to their industry. But I can tell you even we’re a software company, we do have a lot of purchasing, we saved, I’d say tens of thousands of dollars at least when it comes to a supplier quoting you one number, lawyers especially looking at you, and trying to charge you another number. Lawyers are notorious for overcharging. If you’re a lawyer, I’m sorry about that.
Well, that’s happened to us as a startup or a startup that’s been going for four years or five years. That’s happened on numerous occasions, right? That’s really happened to us. We get overcharged and we say, “Well, did you have a purchase order for it?” And they say no and then they can’t bill us anymore. So we’ve saved that money effectively.
Great. And it’s really satisfying as well because normally you get into a situation where someone’s just over-quoting or trying to overcharge you after the fact. It’s kind of down… Sometimes they have you where they want you. You’re halfway through a job, they either finished the job or you walk away and that’s… What can you do? At least with a purchase order we have an extra tool to bargain with. So what a great first tip, Rich. I really appreciate that one.
But I thought I choose that one first.
So after you started using purchase orders, what’s the next thing you should-
I think you need to write down some purchasing policies for your staff. So I think that communication is the key with staff knowing what they are allowed to order and what they’re not and what the expectations of them are. And I think if you were to write down in relatively simple terms what you think your purchasing policies should be, that is who should approve certain things and spend, who’s allowed to spend up to certain limits and those kinds of things. I think you can’t go far wrong with writing those down and then communicating it to the wider staff body.
Actually that reminds me, remember a little while ago, a couple of years ago, we had someone who came in and ordered www.procurementexpress.com. They signed up a bunch of users. I think they were based in London. And then a couple of months later it transpired that whoever had ordered it was an intern or some junior guy in the company. And when the boss found out who… This guy had ordered Procurement Express, it’s probably the best thing he did. But he’d also may have done a bunch of purchasing decisions with other suppliers all over the place without the authority of the boss. Do you remember that, Rich?
We have so many customers. I can’t quite remember that one, but it has happened where people have paid kind of the entire annual fee and then they weren’t supposed to spend that much money and they should have paid it monthly. And there’s been some of those occasions definitely. We hear of those things all the time when people speak to us when they’re looking for a PO system, they’re looking after the fact because something’s happened usually. Right? So we hear those kinds of stories time and time again that somebody has gone off and spent company money on lots of different things when they shouldn’t of.
Point being, I think it can just take one employee to think they have the authority to order something when they might not. It sounds basic. But unless you tell them, how are they supposed to know? And they can end up… You can be on the hook for all that spend.
Yeah. Well, a story there was, I remember in our younger days when we had only a few staff and we set up our office and we asked them to order a fridge and they gave us a PO for a fridge that was about $2,000. And I think the comment that came back from us was something along the lines, “Are we storing a pint of milk or the whole cow in this fridge?” Because it was enormous. So that was the comment that went back and then they went off and found a much, much cheaper fridge. Right? Because that’s all they needed.
The wonderful, magical effect of spending someone else’s money, is how bling people get when that happens. Okay. So we’ve got use a purchase order system and set up a purchasing policy that everyone know who has authority to spend what up to what amount. What else have you got?
So next I’d say budgets, budgeting, which is not as scary as it sounds. So really to me in its simplest form a budget is a name and a value and that’s all it is and the value’s going to reduce over time as you buy something against it. So it’s a category of spend. So all you’re doing is categorizing your spending to a particular part so you can see where everything goes. And those categories or whatever are meaningful to anybody as a company, whatever’s meaningful to the company, be it something simple like office expenses or some kind of highly complicated budgets associated with a particular project.
But getting those categories down and some may be assigning values to them. So saying, “Okay, we’re not going to spend more than $1,500 on office expenses for the year,” or maybe not assigning any values on them at all and just setting them at zero and having them as zero might be the way to go. And just being able to watch those values, watch those zero values go down into negative and see how much you’ve spent and just use budgets. So just write them down, an expectation of how you’re going to spend, so you can see how much you’ve spent against the expectation further down the road.
Yeah, I mean budgets, they’re a way of codifying the payments, I guess, and categorizing them. And then you can set times around them as well to help manage your cashflow. And probably most importantly from our perspective will be you set responsibility for people against those budgets, right?
Yeah.
We’d have that marketing budget, for example, if it goes over the amount and Mariska gets questions, if it goes under the amount, Mariska gets questions. She’s our marketing manager. And then people know exactly what they have to deal with. I mean, the reason to set up budgets is the same reason that communism fails, which is my favorite anecdote. Which is that communist countries centralize their spend and they make the decisions about what needs to be spent from a centralized point. Therefore, sometimes you a big budget for spades being allocated to a dairy farm when they don’t need spades, they need the milk bottles. In other words, you do need the people on the ops side to have budget to play with because they know exactly what they need on the ground. It’s not necessarily the finance people. In fact, it’s often not the finance people who will know what is needed to be spent on.
I’m using budgets as a way of delegating away that responsibility, especially as your team grows. Right? As you get beyond 2050 people, it’s hard to know exactly what everyone needs on each project. If you can set up a budget, you can delegate the spend down. Whoever’s responsibility for that budget can have ownership of it and bring it under, hopefully for a profit if you’re in a project-based business.
So that’s cool, but if you really don’t know what the budget should be, then you can just leave them at zero and see how much you’ve spent over a couple of months and use that as a figure to know what the budget should be next time. There’s a great anecdote I heard from a, I think it was a university in California, it may have been Stanford or somewhere. But what they did when they first built the university was they didn’t build any paths, they just let people walk across the grass and then where the paths were created on the grass, that’s where they then put in the concrete and built the paths afterwards.
So I like that because I like that with budgets you can just set them at zero, see how much you’ve spent over a couple of months and then use that figure as your budget figure, or just ask the person who’s responsible for it to set the budget themselves.
Okay, great. Set budgets. What is next?
So we’ve got it down as the four eyes of procurement and where we mean eyes, we mean eyes in people’s heads. So always when things are being approved upon, they should really be approved by two people. It’s the same in retail. When you want to cash up a register or an EPOS system and count the money, it should always have two people watching over because you get far less fraud when you do that. And it’s the same in this case. So you should always have two people approving. It should be line manager then departmental manager or something of that effect. And they should go up a chain. Two people approving, one person approving a smaller amount than the next person.
Yeah, I mean at a minimum four eyes because you really should have someone requesting for it, someone else paying it and someone else receiving it. Right? Split up those three roles where possible. So there’s no chance. So everyone sees just how pure oversight. Fraud is definitely a thing you have to manage against your risk. But I think just human nature, when you have an extra person involved in any purchase, you’re just going to think a bit harder about that purchase. Right? So you and I have a rule where we can’t spend more than 200 bucks without getting sign off from one another.
Yeah.
And inevitably if I have to spend something under 200 bucks, I’m going to get, human nature, I’m going to buy the… I’m looking at the keyboard in front of me here, very nice keyboard. I could’ve got one for 40 bucks and instead I got one for 120 because I knew I didn’t have to get approval for it. And the same thing happens across your organization. That’s just human nature. So there’s nothing wrong. Like it’s just a very good program and process to have someone else involved. Obviously every purchase doesn’t make sense where it’s under 50 bucks or it depends on the business you’re involved in I guess. In construction it’s going to be higher, software is going to be lower, but just having someone else involved in every decision just makes sense. It’s an intend towards less spend.
Yeah. You getting less mistakes then as well. Right? You’ll get less people ordering duplicate things because the other person knows that that duplicate thing has been ordered and they’ll just say it and that order will get canceled because it’s not needed and things like that.
Great. Okay. And what is the final piece of advice we have for people listening?
So the final piece is negotiation. Negotiation should be done at every stage of the buying process. And if it is, even the smallest… which is what’s the smallest negotiation that people could do? It’s to ask somebody for their best price. Right? I guess. Even if that’s done, then it’s still going to have benefit in the long run to the company.
Yeah. I mean, it all just stuns me that I’d say what, the vast majority of people working in a company have precisely zero negotiation training and yet lots of them have responsibility for purchasing on behalf of the company. I think you nailed it exactly there. If everyone was just had to use the, at the end of every conversation with the salesperson, “Is that your best price?” Those five words alone could save you a lot of money. If everyone just was compelled to ask for, “Is that your best price,” at the end of a discussion, that alone, those five words would save you untold amounts.
And you can go beyond that basic negotiation training. And in fact, part of the book that Garret and I are writing at the moment about how 50 different ways to improve profit and save costs with your organization has a whole chapter on negotiation. You can get a free chapter at book.www.procurementexpress.com. And there, if you can just hand out that book to your staff, get them to read the chapter on Negotiation, it’ll immediately start delivering the dividends as soon as they have to deal with anyone. Negotiation isn’t rocket science. Those five words will help you right now. There’s other different simple techniques for improving prices you’re getting from suppliers.
There’s your favorite BATNA technique.
Yes.
B-A-T-N-A, which stands for Best Alternative to a Negotiated Agreement. So that’s the idea as far as I know it. You basically write down the second best thing that you want out of a particular negotiation, I guess. That’s your best alternative and that’s what you go back to if you can’t get the best one. Right?
Yeah. And we have a bunch of other tips in the book, so please go and download it and that’ll be well worth you’re listening to this podcast. Okay, thanks Rich. So in summary then we have gone through five tips on how a medium-sized company can improve their purchasing today. First up, don’t pay anything without purchase orders, start using purchase orders and use an excellent source like www.procurementexpress.com to manage your purchase orders. I recommend it.
Start using budgets and set up a purchasing policy so that everyone knows who spends what amount of money. Use the four eyes of procurement as we called them. So have double sign off on every purchase. That makes sense. And finally, train everyone on at least the basics of negotiation.
All right. That’s all we have. Thanks Rich.
No problem. Thanks very much.
That’s all we have for this episode. I hope you found this useful. Please leave us a comment. Leave us a review on iTunes. I recommend the five star option. It’s my favorite option for reviews. Works every time and we will see you next time.
All right, folks. There you have it. That wraps up our conversation with James Kennedy and Richard Greenane. They shared a ton of valuable insights and advice today on five ways you can improve purchasing at your company. We also shared some tools and resources, which will all be linked up in the show notes. Don’t forget to click on one of those links to get a free chapter from the book Profit Leaks by James Kennedy and Garret Carragher.
I hope you enjoyed our conversation. Please consider subscribing, sharing with a friend or leaving us a review in your favorite podcast directory. Until next time, best of luck in all that you do and we’ll look forward to seeing you on the next episode of the Gross Profit Podcast.
