Effective Buying – The Hidden Costs of Purchasing

WP-EffBuyBuyers are under pressure to cut purchase price – but aggressive cost-reduction exercises can sometimes lead to sub-optimal buying. Effective buying requires the ability to manage complex, value-for-money trade-offs and to understand the direct and indirect costs and consequences of ownership.

Interest in effective buying has a long history. The Latin phrase: “Caveat Emptor” means “Buyer Beware!” It was used in Roman times to warn buyers to be wary over what suppliers offer.

In more recent times in his classic quote from 1865, John Ruskin warned buyers about the adulteration of goods and services by unscrupulous suppliers: “There is hardly anything in this world that some men cannot sell a little more cheaply and make a little worse. Those who consider price only are this man’s lawful prey.”

What each of these sayings is trying to explain is that, just because everyone regularly buys things, it does not mean that we are all effective buyers. This is because effective buying involves an understanding of fairly complex value-for-money trade-offs and the avoidance of unforeseen, or hidden costs or consequences over time.

An IIAPS White Paper explains how buyers may begin to think about value for money trade-offs between the specific performance (functionality) they receive from a product or service and the total cost of ownership of acquiring it. This is supported by a number of case examples of effective buying.

The White Paper also introduces a structure for effective buying.  This states that the challenge for practitioners is to understand the organisational processes that support sourcing best practice, and then to convince senior management of the need to resource the process effectively.

There are a number of ways in which a sourcing process can be created so that all aspects of buying can be undertaken in a rigorous and robust manner. In general terms any process must accommodate eight steps – from the initial design and specification of the requirement to its eventual market testing with suppliers, through negotiation and contract award to supplier post-contractual performance management and eventually to strategy review and knowledge management.

All of the arguments presented in this blog are fully explained in the IIAPS Whitepaper Effective Buying: The hidden costs of purchasing.

IIAPS
IIAPS
The International Institute for Advanced Purchasing & Supply (IIAPS) is dedicated to the raising of international standards in purchasing and supply management so that real business value - improvements in the quality, cost and delivery performance of supply - is delivered to organisations.

2 thoughts on “Effective Buying – The Hidden Costs of Purchasing”

  1. An interesting article that raises a number of issues for me. I work in an environment in which my colleagues and I are measured mainly against cost reduction targets, particularly given the current difficulties we face. This results in a short-term focus largely on how to drive cost down. Not only does this mean we do not focus on other value factors that may significantly benefit the business, but we fail to recognise the long-term implications of our sometimes aggressive behaviour towards suppliers when driving down cost. I am new to the role and junior in my company so will find it difficult to change the status quo.

    1. Unfortunately, your difficulties are faced by the majority of sourcing professional. As the blog states and cases show, aggressive cost-reduction exercises will frequently lead to sub-optimal buying. Procurement will never be able to add real value while it is only being performance managed on cost down initiatives.

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