If expenses are simply allowed to fluctuate, with no way of monitoring where they will be, optimal profitability will be hard to come by. Cut out as much fat as possible and keep the company lean. Clearly, certain expenditures are necessary and unavoidable. There are ways, however, to limit their influence on company profitability. For example, taking advantage of any offered cost savings an creating efficient procedures to save time and project financing overruns will cut costs significantly. A purchasing requirements program is a start for reducing many hard costs. Most soft costs, however, can be decreased through effective scheduling.
An effective requirements program includes the following steps:
- using purchase orders
- inspecting all deliveries
- taking advantage of discount incentives
- implementing invoice verification procedures
- scheduling efficiently
Using Purchase Orders
Purchase orders are seen as a relic of old business practices by some. Others view them as an indispensable management tool. Somewhere in between the extremes there is a fit for every organization. Their usefulness is in getting reliable quotes upon which invoices can be checked later.
Inspecting all deliveries is essential to make sure orders are shipped according to the quantities and quality specifications provided on the purchase orders. Many managers complain that they do not have the time to physically inspect every item delivered to a work place. Inasmuch as doing so would require a huge time commitment, they are right. However, for containing cost overruns, these same managers could not be more wrong in their assumptions. Inspecting samples from every delivery when delivered and figuring quantities by up close, visual inspection are necessary steps to ensure that suppliers are responding to the company’s needs.
Taking Advantage of Discounted Materials Prices
When suppliers make discounts available on purchases, your team should try to make the most of them. In addition, verify all invoices against delivery inspection reports, checking the invoiced amount against the total amount delivered, and unit prices against the purchase order. This procedure will help ensure that a supplier’s negligence is not costing the company money.
Time constraints are of utmost importance in eliminating inventory carrying costs–whether your business produces goods or services. If a product line or project is slow to be completed, many extra costs begin to accumulate. Alternative uses of profit margins are foregone. Had your team been able to finish sooner and collect within a finance cycle closer to the one in which work began, there would have been profit margin to discuss how to allocate. With margins, choices exist that don’t otherwise–suppliers can be kept happy and bankers and investors can too! If yours is a business that uses work in process assets, insuring those assets is an ongoing cost for the company. Theft and obsolescence of design and features due to carrying raw inputs too long further eat away at margins. The cost to repair items damaged over time also rings up expenses. All of these combine to make inventory (due to delayed delivery) costly.
Proper scheduling is not limited to getting one work team to immediately follow another onto the job. By ordering raw inputs in bulk through purchase orders, trips to supply houses are reduced, resulting in cost savings through lower fuel costs and less time away from actual work. As these employees spend more time on the job and less time running around town picking up materials, their projects are completed faster. Getting teams to succeed one another promptly with slight overlaps can also tighten production schedules and help reduce costs.
By tying your project financing to interest rates in a market where rates are rising, you and your team can make the most of prompt completion of projects. If you operate efficiently, you can move before rates rise consistently. Finally, scheduling vacations with as little overlap as possible will help with your production efficiency, and thereby improve margins.