Elin Sobczak is a procurement specialist and Mountain Guide at RM. In this blog she shares her thoughts on how to maximize the bottom line with the help of purchasing.
Is procurement a crucial part of the service/product you deliver? How much of your total cost is related to procurement?
An important part in supply chain management is purchasing, typically the higher the spend on procurement, the more crucial it becomes to have a supply chain that is not only efficient but also robust. If you handle purchasing professionally it will not only secure a vital part of the supply chain, but also help you make decision and take the right actions.
Now, Let’s talk about coffee. I know this may sound like a trivial example, but it is a good illustrator of the point I want to make.
You have mapped the coffee consumption in your company. On average, an employee drinks 3.4 cups of coffee per day, and each cup costs €1. This means that if you have ten employees you will have an average spend of 10 x 3.4 cups x €1 = 34 € per day.
If you base your procurement only on this information you will probably get a good price for the coffee. But let’s stop and think for a while – are there other products you purchase to the office that are linked to the coffee consumption and impact the true total “coffee-cost”? Some of your employees may take their coffee with milk, or sugar, and there are of course costs for shipping and coffee machine maintenance.
So, before you make any procurement decisions, you must get the complete picture – what kind of “supplier-actions” does your Request for Quote (RFQ) trigger? Remember, your supplier probably knows more about your company’s behavior than you do; if you do not take the full picture into account, your suppliers will give you a low price on the coffee, but will most likely overcharge you for the milk, sugar and/or shipping and maintenance. To get it right you must look at the total cost, in combination with your needs:
To get good coffee, without the hassle – at the best price!
So, before you ask for a “coffee-quotation”, you need to ask yourself some relevant questions:
- Is the ordering of the coffee efficient? How much time does it consume and what is the alternative cost of time spent on ordering coffee?
- What does your service level agreement (SLA) look like?
- What is the total cost for coffee?
Do you spend a lot of time on ordering, or do you have a scheduled automated ordering process with the supplier? Tip, get a schedule, it’s transparent and base it on an SLA!
Service level agreement (SLA)
What service level do you need, e g intervals between service of the machines, refill of the coffee beans, restocking of milk and sugar, maintenance terms & conditions etc?
Not everyone takes their coffee with milk and sugar, but your supplier probably has decent statistics; ask the supplier what percentage of your employees that take their coffee with milk and/or sugar, then add the price and volume to the calculation of total cost for every cup of coffee.
- 10 employees drink coffee, 4 of them take milk and 2 like to have sugar in their coffee.
- The average cups of coffee per day per employee is 3.4 cups.
Black cup of coffee for 10 employees: 1.15 x 3.4 x 10 = 39.1 € per day (inc. shipping, maintenance, etc)
Add milk cost: (0.15 € x 3.4 cups of coffee per day) x 4 employees = 2.04 €
Add sugar cost: (0.1 € x 3.4 cups of coffee per day) x 2 employees = 0.68 €
Total cost for coffee for your company per day is: 41.82 €
Hence, the total cost for your coffee consumption is 41.82 €, not 34€. However, the true total cost is even higher if you include extra time you have to spend on bad ordering processes, inefficient service levels etc.
To master your purchases, you need to analyze and control entire processes. Imagine what you could gain/save if you applied this way of thinking on all your important company processes, not only the coffee.
Read the Rebbel Mountain Block “Purchasing – a strategic approach” to start your purchasing optimization journey.