Procurement, which refers to the act of sourcing and purchasing of goods and services for business use, is an essential part of keeping a business running smoothly. It usually involves the following: identifying the specific material or services that the customers and suppliers need, picking out the best ways and tools to communicate with suppliers, preparing requests for proposals and quotations, and evaluating every element of the above for the best possible value while also balancing cost. With all these firmly in mind, a solid procurement process helps in keeping the business financially healthy while also fulfilling its own operational needs.
With that said, it can be difficult to balance cost and value in the procurement process, especially in today’s hypercompetitive business world, where the temptation to cut corners just to keep in pace with rivals is always at a high. Balancing purchasing and cost must also be taken into serious consideration. Otherwise, not only will the business’s finances start to be drastically affected, but also its ability to actually continue operating.
Thankfully, there are some concrete ways to help to make balancing cost and value easier all around. Before we explore them, however, let’s first differentiate cost and value, as well as where purchasing comes into the picture.
What do cost and value mean in the procurement process?
When we talk about value in the procurement process, it refers to the total measure of the benefit of a purchased good to a company. This measure not only includes the cost of the good and the profit the company stands to gain with it, but also the complete return on investment related to the performance of the business operations that hinge upon having such goods in stock.
Cost is similar to the value in a way, in that it represents the totality of a good or service, but this time based on how much money is spent delivering the good or service. All the details and minutiae are taken to stock when the cost is concerned—including the usage of utilities and tools in the harvesting of the raw material and its processing, manpower, labor, and even marketing. It should not be confused with price, which is the monetary amount a consumer or customer pays for a finished product or service.
Purchasing is the very act of money being exchanged for a good, and it should also not be confused with procurement, as the former usually takes place in the final stages of the latter. In fact, it can be considered that the procurement process is completely separate from purchasing, as procurement is all about doing all the things necessary to find a supplier that offers the best in terms of cost and value.
Now that we’ve clarified these terms, let’s explore the ways on how to balance cost and value in procurement:
Integrate an ERP system into your business infrastructure
An ERP system has the capability to automate many of your tedious business processes, such as bookkeeping, inventory management, and so on. This automation can help massively in streamlining your work processes and making your operations lean, efficient, and error-free. This can easily help drive down your operational expenses, which in turn reduces overall cost in everything you procure. As a result, you will be able to get as much value for everything you purchase.
Aim to create great relationships with suppliers
In business, it pays to create close partnerships with those who you work with. The same goes for suppliers. By ensuring that your relationships with your most trusted suppliers are a positive and pleasant one, you will enjoy certain benefits that will help drive down the cost of what you end up purchasing from them, as well as drive up its actual value. Such benefits include bigger discounts, free shipping, extra padding or protective material in the shipment of your purchased goods, etc. They may also endorse you to potentially big clients.
Offload useless, faulty, or obsolete assets
Running a business will almost always result in a stockpile of assets that are hardly longer of any use for the business. These can be anything from faulty or broken-down machinery to even raw material that has long since perished or become unusable.
A business must always be on top of cataloging all of these assets and disposing of them ASAP in order to keep total operational expenses manageable. This again has a net effect on both cost and value in the procurement process, especially when the asset being sold directly benefits business operations. An example of this may include warehouse space being freed up after old and decaying assets are disposed of. This allows that warehouse space to be used in storing new and fresh assets, negating the need to rent or construct another warehouse.
Look into bartering
Bartering is the time-honored way of transacting where one asset is directly exchanged for another, and without currency getting in the picture. This allows you to get something for your asset without having to deal with overhead expenses that could drive up your procurement costs, such as those related to sales, distribution, and marketing. Bartering can easily be used in improving relations with suppliers and customers, as well as help you offload unusable assets in a less expensive way.
Balancing cost and value in the procurement process is essential in any business
Don’t underestimate the importance of balancing your procurement costs and resulting value when it comes to running a profitable business. While it may seem like tedious busywork that factors in monetary figures down to the last cent, doing so properly is an essential habit that will see to your business being profitable and afloat for years to come.