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How to Reduce Transaction Costs

For many years, organizations have been concerned about the cost of transactions involving the purchase or sale of goods. Companies have reduced their sales forces and eliminated routine calls on customers. For example, the large steel producers no longer call on every customer of small quantities of steel. They either leave it to the distributor to make the calls or assume the buyers will make the initial contacts when they need material. Today, companies are more concerned than ever and much of the concern is about the cost involved in the purchase of low-cost items and small-quantity requirements. This concern is in part a result of a massive advertising and marketing campaign by banks and credit card companies to sell procurement credit card systems to business. No one can doubt that the cost of small dollar sales or purchases often exceeds the value of the items involved. But there are time-tested ways of minimizing the problem without resorting to the use of the credit card system which delegates the buying function to non-professional purchasing people. The person in the purchasing department who is responsible for small-dollar purchases usually has the title of MRO Buyer. They may also be called Office Supply Buyer or have various other titles such as Junior Buyer, or Assistant Buyer. It is not important what their title is. It is important that they have the proper skills and understanding of their job. They should understand that in addition to obtaining the material required, their job is to minimize the total cost of obtaining that material. Minimizing the cost of obtaining low-dollar items does not mean reshopping or negotiating for every purchase. Controlling the cost of each item must be combined with the total cost of the transaction and minimized in other ways. One reason why transaction costs have been so high is because low-dollar purchases are too often assigned to inexperienced or poorly trained buyers who do not understand how to properly minimize those costs. It is just as difficult to control those costs as it is to control the costs of high-dollar or high-volume items. Purchasing managers often are only concerned with controlling the cost of the high-dollar items and neglect to implement systems and measures that will provide controls for the MRO items. Keeping transaction costs under control is accomplished in seven ways. 1. Have a well established requisitioning system so that the user will clearly indicate what is required. Preferably. the system should be on-line so that ordering time is as quick as possible. 2. Use blanket orders and release forms, for frequently purchased items. 3. Use systems contracts for the major categories of MRO items. Typically those categories include janitorial supplies, plumbing supplies, electrical supplies, and office supplies. 4. Develop strong relationships with service providers and issue negotiated annual contracts to reliable suppliers. 5. Establish standard products, wherever possible, to minimize the number of different items purchased. Some companies issue their own catalog of common MRO items used internally. 6. Consider service parts and maintenance when purchasing capital equipment items. Try to determine where repair and service items will be obtained before the capital item is purchased. 7. Negotiate a simplified payment system to minimize paperwork. Various systems used include issuing checks with orders, monthly invoices and statements only, and electronic fund transfers. Supposedly, giving credit cards to non-purchasing people allows purchasing personnel to spend more time on the larger transactions, but time saved by purchasing is in part transferred to users. True, the time to prepare purchase orders or other paperwork can be eliminated, but that paperwork can also be minimized by using the systems mentioned above. With the credit card system, users must spend time contacting suppliers and listening to sales presentations. Meanwhile, they are aware of their major duties. A professional purchasing manager is just as aware of the need to minimize transaction costs as the need to keep product costs as low as possible. In order to do so, many factors must be taken into consideration. It is a continuous job requiring thought and effort. Quick fixes or easy solutions are rarely the answer. Doing away with buyers and turning the purchasing job over to inexperienced non-professionals may turn out be a costly mistake. Steve McCuen is an independent purchasing manager based in Encino.

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