Bringing Purchasing Out of the Dark

by Dr. Reginald Peterson

Reginald Peterson is director of Indirect Products at AmeriQuest Business Services. In this role, he leads the company’s growth of its indirect procurement offering that helps organizations better manage their procurement lifecycle to reduce cost and complexity. Prior to joining AmeriQuest, he spent a total of 16 years as a senior procurement manager for Coca-Cola and as a procurement manager – indirect materials for Siemens.

AmeriQuest’s Dr. Reginald Peterson explains how important procurement is to a company’s bottom line. He explains that having an organized, transparent procurement process is a profit driver that may you be overlooking.

Operating margins are thin for most businesses these days and slow economic growth is impacting the bottom line. Yet amazingly, many companies overlook a profit center that is hiding in plain sight: procurement. What is purchased, how goods and services are purchased and who makes the purchases all impact the bottom line, and if managed efficiently, can contribute to a company’s profitability.

On the surface, purchasing equipment, products and services to operate a business seems pretty straightforward. But the reality is quite different.

In a recent survey conducted by AmeriQuest Business Services, 2,000 respondents who were responsible for managing or influencing their company’s procurement process shed light on why this process so often falls short of its potential:

  • 20.4% of the companies had no procurement process in place
  • 13.3% had no idea if their company had a procurement process in place
  • Less than a quarter of the survey respondents indicated that procurement was viewed as a strategic business partner
  • Another 25% noted that procurement is simply seen as a function of accounts receivables/account payables
  • 15% of the survey respondents didn’t know which department managed their company’s procurement, even though they were directly involved in the process.

We refer to these rather startling findings as “dark purchasing,” defined as the inability to track where a company’s expenditures are going. Employees are often confused about the best way to make purchases for their companies, which leads to inefficiencies across the enterprise and valuable earned revenue down the drain.

As in most things in life, the little things matter, and that’s where dark purchasing can incrementally chip away at profits.

While a $6,000 expenditure is being scrutinized, the $6 purchase is moving down the line with scant attention, if any. Yet every day, companies process thousands of these low dollar volume purchases which amount to a significant spend and could be the source of significant savings if managed properly.

But dark purchasing applies to bigger ticket items as well, like asset acquisitions. Fleet owners are always looking for ways to lower the cost of acquiring equipment, but there are hidden costs in those acquisitions that can only be determined by examining the total cost of ownership during the life cycle of existing assets.

These total costs include the dollars spent on maintenance and repair, and the cost of downtime while the trucks are in the shop. Also a consideration is the resale value of the asset when the time comes to retire it.

This is why it is so important for operations and maintenance people to be involved in the asset purchase process to ensure that these cost factors become part of the purchasing equation.

Looking only at the sales price of an asset will not give the fleet owner the complete cost picture. Unfortunately, a lower price on the front end does not necessarily mean a lower cost collectively.

The increased cost of equipment in today’s market has many fleet managers planning to keep their assets longer than they would have previously. But there are hidden costs for that decision that, in some cases, won’t remain hidden for long.

To make informed decisions on whether to hold an asset or buy a new one, fleet managers need to track the costs of maintenance and repair on their older assets. For example, without analytics, many small and mid-size companies may not be capturing the full cost of on-the-road breakdowns. The data may well show that the longer a fleet holds on to an asset, the more it is costing them.

Even the service location where the truck ends up after a breakdown becomes another enabler of dark purchasing. Was the decision made simply to choose the nearest repair location? Or was there a process in place that identified a service provider where the fleet has an established relationship that includes parts pricing discounts and negotiated service rates?

Add to the “hold ‘em or fold ‘em” decision-making process the fact that newer assets feature technologies that offer reductions in maintenance costs and/or lower fuel consumption. These savings need to become part of the purchasing decision when significant capital expenditures are required to purchase new assets as they can mean less overall cost to operate a fleet.

Smart, cost-effective purchasing decisions rely on available data funneled through an organized, transparent procurement process that identifies approved vendors, procedures and those in authority to make and enforce the purchasing decisions.

Taking purchasing out of the dark gives fleet owners and managers a systematic approach to buying decisions that is fact-based and revenue-driven.

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