This series will cover a number of topics related to the power of purchasing. The first part covers an important question, “How can I increase profitability through my purchasing department?”

Purchasing (in my admittedly biased opinion) gets a pretty bad rap considering its importance in a company. CEO’s and managers tend to brush it aside as a necessary evil…only there to get the raw materials the production manager needs…or bring in the inventory for the sales force to sell. Purchasing is not a sexy department. But the purchasing department is the place where a company can most easily turn a larger profit or increase profit margin. Yes, you read that correctly. Why? Because it is easier for a buyer to cut costs than it is to sell more. Here’s an example:

Let’s say I buy a table and two chairs for $5 each. Then I put them in a box and sell them for $30. That’s a profit of $15 per transaction. I sell 10 of those per month for a profit of $150 a month.

But what if I search for a new supplier for the table and chairs? What if I find a table and two chairs for $4 each. Then I sell them for the same $30. I have just increased my profit per transaction to $18. My new monthly profit is now $180. I would have to find 2 new customers willing to buy my old product to make the same profit!

Of course, what industry you are in…and the type of business you choose to run will affect how you manage this. In my business, I never want to sacrifice quality just to get a better price. The temporary elevation in gross profit is not worth the long term damage that would take place after my customers left due to sub-par quality. Other industries are so saturated that the products they sell are basically commodities — the quality is the same no matter where you buy it and it all comes down to cost.

Obviously the best outcome is to cut your costs AND increase the number of customers. This is why it is vital for your buyers and sales force to be working together (although I certainly understand why that is hard! Buyers spend all day dealing with slimy salespeople…and salespeople spend all day dealing with rigid buyers!). But having everyone in sync will make the process of establish selling prices much easier…and more profitable.

As a buyer, your number one priority is to make sure you have all of the materials or product that your company needs. But priority 1A should be to constantly source and negotiate better pricing from your vendors. Having this aggressive purchasing strategy will streamline all of the other functions of the company.

Improved Purchasing = Increased Sales.

It’s as simple as that.

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