Optimising your purchasing and planning systems is a very effective way to improve the profitability of your food and beverage business.
The first thing to do is streamline your working methods to maximise your efficiency. If you’d like more on this subject, you might like to read How do I standardise processes as my food and beverage business grows?
Once you’ve looked at what you can do in-house to improve your systems, my advice is to look at the issue strategically.
Let me give you two examples of this. The first is to look at purchasing and planning as part of the bigger picture of your business. The second is to think like a big company.
Look at improving purchasing and planning as part of the bigger picture
In my experience, many food and beverage businesses think of purchasing and planning as separate to warehousing and logistics. On the face of it, this makes sense. They occupy two separate lines on the budget sheet. They may be two separate functions within the business.
But if you want to improve your purchasing and planning systems, you need to start thinking about the two as being connected. When you do, there is a lot to be gained.
Here’s a simple scenario to explain why.
Let’s say your purchasing and planning function has been looking at order volumes so they can switch to bulk ordering to enable them to negotiate discounts with suppliers.
They’ve worked out that they typically order eight pallets of tomato sauce a month. They’ve spoken to the supplier and agreed that if they switch to ordering 24 pallets of tomato sauce every three months rather than eight pallets every month, they will be able to secure a discount.
This sounds like a sensible decision. But here’s why it may not be as sensible as it seems at first glance.
First, there’s the UK standard for transporting palletised goods to take into account.
It’s 26 pallets per truck. So while the unit cost for the tomato sauce will be lower, the transport costs per item will increase.
Then there are the additional warehousing costs to consider.
Storing three months’ worth of tomato sauce will take up three times as much warehouse space and cost up to three times as much. Plus for two of the three months you’ll be paying for empty space.
Despite all this, bulk ordering makes a lot of sense. But you have to factor in the impact on warehousing and logistics implications and make decisions that balance the needs of both.
It is important to say that none of this is easy. To balance purchasing and planning requirements with warehousing and logistics efficiencies will require complex calculations. The chances are that you will need to have implemented some system improvements so that you have access to the data you need before you can even start to consider it.
But despite the complexity, it’s a very worthwhile exercise because there are big rewards when it comes to efficiency, costing and inventory management. In this articel from Cerasis: The Necessary Steps for Smarter Logistics Planning
Think like a big company
Now let’s look at the issue of thinking like a big company.
When you first started out in business, you purchased stock as you needed it. Cashflow probably wouldn’t allow you to do anything different even if you’d wanted to.
As you’ve grown, you’ve been able to shift to buying in bulk so you can get economies of scale. But there are some pitfalls you need to avoid in the procurement process if this is going to help you achieve the gains you’d hoped.
Let’s take the example of the tomato sauce again.
You’ve switched to purchasing tomato sauce on a three monthly cycle. Typically, the shelf life on the sauce is four months, so you don’t have to worry about use by, sell by or best before dates.
But let’s say that in your latest delivery the shelf life on half the tomato sauce is just one month. This means that over half the stock will expire in your warehouse before you’re able to sell it.
Suddenly, you’re faced with a problem.
Do you try to sell three months’ worth of stock in one month? Or do you waste two months’ worth of stock?
Neither option is appealing. And either way, you’ll be left with two months where you don’t have any stock to sell.
The solution to this problem is simple. It’s to put some robust rules into your procurement strategy. This is one of the most important stepr you can take to improve your purchasing and planning policies. For example, when you’re negotiating with your suppliers, make sure you put a purchasing contract in place. This can stipulate certain conditions such as the minimum shelf life on stock that you take.
I’ve worked with small and medium food and beverage businesses for 20 years. Even ones with turnovers of £20 or £40 million a year don’t always have purchasing contracts in place when I start to work with them. It’s a straightforward fix that protects your business against circumstances such as this one
Shift your mindset
The first step to improving your purchasing and planning systems is to streamline and standardise the processes you have in place. [link] There are almost invariably big gains to be made here.
But you can and should look to the next level too by thinking strategically about your systems.
I’ve worked with numerous food and beverage businesses over the past 20 years to embed this strategic thinking. In my experience, the process involves a mindset shift. It’s about moving from the mindset of a small, brave business that has little negotiating power to a bigger, more powerful business that has got leverage. Once you’ve embedded this thinking, you’re equipped to scale much more efficiently.
If you’d like to see how I could help your food and beverage business make this shift, let’s have a conversation.