Do you ever get an uneasy feeling that your purchasing system is out of whack? Are you concerned that expenditures are being made on your company's behalf that would never meet with your approval?
An effective purchasing system is essential to survival in the competitive manufacturing industry.
Finding an agreeable balance within a purchasing system can be a hard-won victory. Some companies react by over-controlling expenditures without considering whether the benefits of controls outweigh the costs. For example, it may not be worth a busy executive's time to review a $100 order of routine supplies, but renegotiating a major supply contract may be well worth the effort.
The benefits of coming up with a workable purchasing system can usually be measured in savings. For instance, one business had several different locations — each with its own approach to buying paper, pens and other materials at various local office supply stores. By consolidating purchases, the company saved 15% in expenditures.
Here are nine questions to help evaluate your manufacturing company's purchasing system:
- Does your company have written policies and procedures about expenses that the accounting department uses when reviewing submitted invoices?
- Does the accounting staff understand (either by written policy or by verbal agreement) when it's not necessary for an employee to seek his or her supervisor's approval for an expense?
- Have you established expense limits for each department head, so that he or she can make expenditures without prior approval up to a certain level?
- Does the accounts payable department have a list of what "spending without approval" limits have been set for each appropriate employee?
- Have you hired a purchasing agent in your company whose sole job is making purchasing decisions?
- Does your company have a formalized purchase order system?
- Does everyone in your company understand how to use this purchase order system, and are they using it routinely?
- For expenses that require a manager's approval, do employees' requests ever get turned down?
- Do the CEO and top accounting executive review policies and procedures on expenses annually and make adjustments as needed?
Give yourself 1 point for every "Yes" answer.
If you scored 9 – Congratulations! Your expense/purchasing activities are highly efficient and productive.
If you scored 7 or 8 – Most of your expense authorization and purchasing efforts are on target. With a little tweaking, you can improve your performance in this area.
If you scored 5 or 6 – By making purchasing a high priority, you can have a dramatic impact on the efficiency and effectiveness of your expense/purchasing process. Failure to do so may have negative consequences soon.
If you scored below 5 – It's time to go back to the drawing board. You might consider discarding all your expense/purchasing practices and starting anew. Your accountant can help you institute a new, more efficient process.
Improving Your Score
An efficient purchasing system is essential to success in the manufacturing sector. Contact us for ideas on best practices that can boost your bottom line and add long-term value.