Distributors Help Customers Streamline Procurement
Organizations need to know exactly when, where, why, and how items are being purchased -- and this is where distributors can play a defining role.
- By Robert Kravitz
- Nov 01, 2012
While the economic downturn has certainly caused considerable pain for millions of people and scores of businesses throughout the United States, it has also had its benefits. For one, many businesses and other organizations have learned how to streamline their operations, which invariably leads to reduced operating costs and enhanced productivity.
This can apply to many aspects of business operations. For instance, many employers recently reported they have not been hiring new workers because, quite simply, they have found they do not need them. Making some personnel and structural changes in their operations has allowed them to operate their businesses more efficiently and productively without the need for additional staff.
Another way organizations have been able to improve efficiencies involves streamlining purchasing and procurement. However, in many situations, organizations simply may not know exactly how to go about this or about technologies now available to help them accomplish these ends. Because of this, streamlining procurement and enjoying the cost savings that can result has not always occurred. In fact, procurement managers are not always sure exactly what they are purchasing, in what quantities, from whom, or even when. Frequently this results in unnecessary or redundant purchases. Further, because total product purchasing information has not always been available, some organizations fail to take advantage of special manufacturer or distributor discounts.
For example, a multi-office, Chicago-based health care organization found its various locations were purchasing identical products from different vendors. Those items very often were named, listed, or categorized differently on master purchasing orders. Over time, it became difficult to keep track of how many items were being ordered or purchased. Worse, there was no effort made to see whether comparable products at a lower price could be substituted for the items purchased.
Once the organization became aware of the problem, the accounts payable department was tasked with clearing up the confusion and correctly identifying and categorizing each item. This was a time-consuming, costly process that caused many invoices to be paid by hand instead of electronically, resulting in frequent delayed payments. Not only were opportunities for early pay discounts missed, but in some cases, interest charges were added to old invoices due to late payments, further adding to costs.
EDI: Automating the Purchasing Process
The Internet has helped many organizations better manage their procurement and purchasing processes. Numerous organizations have been able to take advantage of what are often referred to as electrical data interchange, or EDI, systems.
The U.S. Department of Commerce's National Institute of Standards and Technology in 1996 defined EDI as a "computer-to-computer interchange of formatted messages" designed to work automatically without human intervention, thereby reducing costs. When using them to make purchases, organizations can set up EDI networks with various vendors, making it possible to send purchase orders either at the request of a purchasing agent or automatically (usually after a specific time period).
However, while this was an improvement over old manual purchasing processes, many businesses and organizations found these systems still lacking. In some cases, corresponding purchase order acknowledgments were sporadic, requiring purchasing agents to follow up and confirm orders by telephone. Follow-up was also sometimes necessary to confirm when the product would be shipped. Because of this, one of the potential benefits of EDI—eliminating human intervention—was not fully implemented, resulting in little, if any, cost savings.
As we will discuss later, EDI systems are simply designed to facilitate orders. They do not help procurement managers shop, looking to see whether a comparable product by another vendor (or even the same vendor) will meet the facility's needs but have other benefits such as a lower cost or being green or more sustainable.
Turning to Analytical Tools and Processes
Some of the logistical problems surrounding EDI systems have been or are being resolved. Still, organizations need better ways to harness purchasing and procurement information so they know exactly when, where, why, and how items are being purchased -- and this is where distributors can play a defining role.
One way this can be done is for distributors to use analytical or diagnostic tools, said Michael Wilson, marketing director for AFFLINK, a leader in supply chain management for more than 35 years. "These systems are essentially a process," he said. "They allow managers and distributors to combine consultative selling with leading-edge technology. [They are] specifically developed to address the operations, management, and procurement needs of organizations in such diverse industries as food service, health care, manufacturing, real estate/building management, government, and education."
Putting these analytical tools to work, he explained, managers working with their distributors can:
- Uncover new opportunities to improve the overall health of their facilities by selecting more environmentally preferable and sustainable products
- Lower business operating costs
- Increase worker productivity and morale
- Meet sustainability and green objectives
"We have found that, in essence, these systems can provide answers where many managers are still struggling with the questions," he said. "The process is able to analyze vast quantities of information and then turn it into useful insight."
Using one of these analytical tools typically involves the following steps:
- Discovery. This is the "consultative selling" step referenced earlier that includes gathering all purchasing information and entering it into a hand-held system. Each purchased item is identified as to type (chemical, paper product, hand soap, etc.); given an identification number; and labeled with its cost per unit, amount purchased, and other details.
- Needs Analysis and Solution Selection. With all purchasing data entered, the system allows the user to select alternative products where preferable or necessary. For instance, the system might suggest swapping a conventional cleaning product for one that is environmentally preferable. This corrects the big drawback of conventional EDI systems.
- Procurement Analysis. The system then recommends ways to make the purchasing and ordering process more efficient, identifying potential inefficiencies and areas of waste in the supply chain process.
- Workloading. Labor represents 70 percent or more of an organization's facility maintenance budget. These systems can be used to take a "snapshot" of current labor deployment and identify opportunities for efficiency in these areas, as well.
"The goal with these systems is to interpret vast amounts of data quickly and to turn that information into insight," Wilson said. "Then managers and distributors can make logical, rational, and fact-based purchasing and business operating decisions."
The system also is designed to offer clarity and perspective to purchasing and procurement at a level that has not been possible in the past for many organizations, which leads to streamlining purchasing and procurement and reducing related costs, he said.
Many consultants refer to what the economic downturn forced upon many organizations -- rooting out the inefficiencies in their operations, streamlining operations and, at the same time, reducing operating costs -- as a "cleansing" of the organizations. A similar cleansing can occur when it comes to using processes and tools that make purchasing and procurement practices more efficient. Duplicate entries, redundant purchases, and inaccurate product data can be eliminated. The company can take advantage of lucrative supplier discounts and avoid costly late-payment charges.
This process can help to minimize the amount of time and labor needed for accounts payable departments to process vendor invoices. Of significant importance, it helps managers compare products, looking for those that can have additional benefits beyond those of products purchased in the past.
This article originally appeared in the November 2012 issue of Occupational Health & Safety.