Tips for Wringing Out Cost and Improving Gross Margins

Purchase, Don’t Expedite. Time is money. Given a little time, a purchasing manager worth his/her salt should be able to wring a significant amount of cost out of any purchase. So give him/her incentive and time. Expedited orders add substantially to freight cost, and when you need it quick, your bargaining power is weak.
Use ABC Stratification. The ABC inventory control method derives both its simplicity and effectiveness from the 80-20 rule: 80% of a company’s revenue is derived from 20% of its offerings. Additionally, within this 20%, you should learn what components make up 80% of the cost of these products, and then work to continually reduce the cost.
Competition Is Key. As cost control legend Henry Figgie, Jr. says, “Competition is the key to any free market system.” It’s also the key to cost control in your business. Always get bids from multiple vendors. Always let each vendor know you’re getting bids from others and that price matters. Always open your door to new vendors and new quotes. Never single-source.
Standardization of Materials. Avoid use of special, unique, rare or exotic materials. Move to items, parts or materials that are common and available for low prices from a variety of sources. Identify the expensive parts you purchase. Find substitute parts that could be used instead. If necessary, re-engineer the product or part so cheaper generic parts can be used.
Reduce Shipping Cost. It’s not just about the cost of the purchased items, but rather total delivered cost. Shipping (freight, delivery) costs must be minimized, too. Watch them. Track them. Always specify the lowest cost. Talk to your vendors about how you can lower shipping cost. After all, what you want is the lowest delivered cost.
Eliminate Graft, Conflict of Interest. The person who handles your purchasing spends significant dollars. You definitely don’t want this person to have any reservations about screwing down costs at every opportunity. Do not hesitate to switch vendors. Do not allow this person to accept, nor any vendor to provide, gifts or perquisites of any kind to your purchasing manager. Annually send a letter to each vendor that communicates this policy.

This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2010.

This publication is intended to provide general information on the subject matters covered. It is sold and distributed with the understanding that neither the publisher nor any distributor or advertiser is engaged in providing legal, tax, insurance, investment or other professional advice. The advice of a qualified professional should be sought before any reader applies a concept presented herein to his or her particular situation or business.

D.L. Perkins, LLC is solely responsible for this content.

You can leave a response, or trackback from your own site.