How a Purchasing Management System Helps with Cost Control

13 August 2021
How a Purchasing Management System Helps with Cost Control

It's always a good idea to check if you are getting value for money when buying goods or services. For businesses, effective cost control and cost saving practices could even make a day and night difference to your P&L.

Established businesses will already have some sort of procurement management system - usually manual processes put together using spreadsheets or desktop databases. For sure there's no software licence fee to pay, but the downside is that it's not easy to find information or process tasks, and often it lacks the measures needed to effectively control and save costs.

For this reason, more and more businesses are switching to purpose-built software systems to manage procurement aiming not just slicker processes, but also more effective cost controls. Broadly speaking, there're 3 parts when it comes to using a purchasing management software system to control costs.

Firstly, Control Over-Purchase Commitment

It's almost a given that the foremost thing a purchase management system needs to manage is the purchase request approval process. Validating before the sending out a purchase order to your supplier is great from the purchase commitment control point of view.

When a purchase request is raised and sent to an approver, the approver will have an opportunity to exam if the need to buy something is genuine and appropriate. Documents and notes can be attached to the request, so it's easy for the approver to see the context of the request and its justification together. Search function can be used to identify previous orders with similar items for cost comparison purpose. Some systems also offer customisable item catalogue, so that orders can only be raised on items pre-approved by the business. This is very useful because pre-approved items take out the risk of un-vetted suppliers and unexpected pricing.

Different approvers can have different authorisation limit configured in the system according to their roles and authority in the business. It's no surprise that senior executives have higher authorisation power than line managers. This higher power comes with greater level of responsibility. Senior manager often apply more scrutiny to protect business interest from errors and mistakes. It is a good practice to assign approvers with different levels of authorisation to bring structure into the approval process.

Once the checks have proved that the request is indeed required and everything looks right, the approver can click the "Approve" button knowing it's a right purchase. With the control of commitment, your business can be certain each and every PO is genuine and fit for its intended purpose. In another word, no money will be wasted due to wrongly placed purchase order.

Secondly, Control Based On Budget Impact

Being able to control purchase commitment is great. However, if the approval process carries no relation to the budgets, you'll not know how the purchase commitments impact the budgets. In that case what you have is just a half of the story and some incomplete controls that do not close the loop.

Purchase requests come in all kinds of nature, priority, and urgency. When budgets become tight, or that you operate on thin profit margin, some purchases might be the right thing but not at the right time. You need to pick and choose the most important purchases to ride waves or drive toward particular goals. Knowing where your budgets stand before committing further spending is crucial in such scenarios.

Most purchase management systems have some kind of budget features built in. Some systems do so in a simple way that allows you to simply assign budget limits to budget streams or departments. Simple but not so nice as you might miss key information on how POs consume budgets at the areas or levels where the real attentions need to be paid.

Other systems provide more granular control by allowing you to build up complete budget sheets made up from detailed budget items. By employing such robust budget settings, you can link a PO to different levels of a budget - a budget stream, a department, a category, or even to a budget item from an annual budget sheet. This enables budget control at all levels should you need it.

At the point of reviewing a purchase request, approvers can be informed by the system on where the budgets stand at present at all levels. They get to see how clicking the "Approve" button would impact the budget condition of particular concern. This empowers approvers with a great ability to make purchasing decisions that serve the best interest of the business in all scenarios. Approval process linked to strong budget features helps businesses tie purchasing activities to the business targets. In other words, effective cost control directly serves business goals.

Thirdly, Spot Strategic Cost Saving Opportunities

A purchase management system generates a huge amount of data. Over time, it accumulates to a data set that's worthwhile looking into. Many purchase management systems provide analytics and reporting that help you gain insights into your purchasing activities.

Do you know who your top suppliers are in terms of spending value? A good system provides top supplier reports by departments, budgets, and for the whole business. Knowing which suppliers having most business from you allows you to assess whether there're any opportunities to open dialogue for price negotiation.

Do you know which business units or categories incur the largest expenditure? Are they the right areas in terms of business focus and strategy? If not, which other areas should be and how are they doing when it comes to spending and investments? Knowing how money is spent among different business areas provides a chance to review budget allocation and bring spending more aligned with business focus and plans. Reduction on non-strategic spending is obviously a nice win, it keeps business lean and gives a great push for profitability.

Are there items that different departments buying from different suppliers at different prices? Do these teams know that simply switching supplier can get them a better deal? It'd be logical that the business should gather the requirements together and let suppliers tender for best prices. If there is a scale of economy opportunity, spot it and grab it!

Are there penalties for late payments? Alternatively, are there discounts for early payments? Invoices come in with supplier payment terms, and typically there are penalty clauses stated on them. Though not always enforced, when they do it's an unpleasant cost. Some suppliers encourage early payments by providing early payment discounts. If cash flow is not an issue, why miss out on such cost saving opportunities? Look for a purchase management system that provide reports with invoices grouped by their due dates. Make sure you check such reports if available, as you might be able to pick up a nice saving by just setting up payment schedules right.

With the analytics and reporting provided by modern purchase management systems, it's much easier to see the big trends, revealing the profiles of your purchases through automated analysis of transactions. Cost control is reviewed and considered beyond day-to-day process, and savings can be achieved by applying more strategic measures.

Summary

Modern purchase management systems not only provide smooth purchasing operation, but is also a great help to cost control and cost saving. They allow businesses to make right purchase commitments, understand impacts from purchase to budget, as well as provide insights for spotting strategic cost saving opportunities.

Approvol is a solution for efficient budgeting and purchasing management. Approvol comes with flexible budget control and insightful analytics. If you are considering employing a modern purchase management system for improved cost control, contact us today to request a demo and find out more.