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Purchase Cost <br />“Everywhere Production goes, Costs follow behind like a shadow.”<br />Purchasing is the act of buying the goods and services that a company needs to operate and/or manufacture products.<br />Given that the purchasing department of an average company spends an estimated 50 to 70 percent of every revenue dollar on items ranging from raw materials to services, there has been greater focus on purchasing in recent years as firms look at ways to lower their operating costs. <br />Purchasing is now seen as more of a strategic function that can be used to control bottom-line costs. <br />Purchase Cost is the cost incurred in procuring the raw materials/input goods.<br />
Traditional purchasing process<br />Requisition, soliciting bids, purchase order, shipping advice, invoice, and payment.<br />Regarded as unacceptably slow, expensive, and labor intensive.<br />Purchasing was seen as essentially a clerical function.<br />Purchasing simply was not considered to be a high-profile or career fast-track position.<br />
BUT WHAT NOW??????<br />That attitude has changed in recent years, in part because of highly publicized cases wherein companies have achieved stunning bottom-line gains through revamped purchasing processes.<br />As a result, new strategies are being used in purchasing departments at companies of all size. <br />
Modern purchasing process<br />New concept of total cost of ownership (TCO).<br />Instead of buying the good or service that has the lowest price, the buyer instead weighs a series of additional factors when determining what the true cost of the good or service is to his or her company. <br />these factors can include "price, freight, duty, tax, engineering costs, tooling costs, letter of credit costs, payment terms, inventory carrying costs, storage requirements, scrap rates, packaging, rebates or special incentive values, [and] warranty and disposal costs." <br />
Purchasing Cost Reduction Ideas<br />“Planning for the purchases is one way to reduce the cost.”<br />BULK BUYING<br /> The companies which have greater geographical presence or are multilocational can achieve better price by buying bigger volumes instead of buying for individual units. Central buying policies are recommended for such unit .Bulk buying results in annual contracts for a period of six - twelve months for entire year requirement with prices being finalized for the entire period .<br />
OPPORTUNITY BUYING<br /> Most of the commodities and raw material has seasonal cycle of prices as they peak and fall in intervals .Hence we can book maximum amount of our requirement when prices are low.<br />LOCAL VENDORS<br /> Vendors should be located in close vicinity of company which helps in keeping low inventory as well as low freight cost .<br />PARTNERSHIPS WITH MAJOR VENDORS<br /> It is highly recommended to have partnership with vendors in either having equity or technical collaboration so as to pass on savings to the customer . Which results in cost reduction in manufacturing cost. Most of the Automobiles Majors has this kind of arrangement with their vendors .Vendors are assured of business .<br />
E Procurement<br />Putting up tenders and requirement on Internet and setting up auction for requirement on web which helps in reaching out more numbers of vendor base . This also helps in cutting cost when we opt for conventional way of asking tender /quotation . Most popular way of procurement strategy is reverse auction , where the lowest price bidder takes away the order.<br />BUYING MATERIAL FROM TAX EXEMPTED AREA <br /> In several countries the federal/ State govts provide tax heavens for manufactures for certain period say 10- 15 years .Hence buying from these area s helps in cutting cost .In common parlance it is called TAX HOLIDAYS . Look out for such places prior to placing orders.<br />
ALTERNATE MATERIAL- <br />Select high cost items and replace it by some low cost material.<br />Eg; steel by plastic/aluminium.<br />TRY MERGE IN TRANSIT-<br />The concept of in-transit product merging—where, for example, two things are shipped from different locations and then married in transit so that they reach the customer as a single shipment—can be seen as a technique for reducing inventory .<br />
VENDOR MANAGED INVENTORY (VMI).<br />With the appropriate incentives, allowing suppliers to assume the responsibility for replenishment of your inventory, because of their visibility into both their own inventory and production schedule and your demand data, can almost always reduce your inventory.<br />