Purchasing mistakes are increasingly common and avoiding them can save time, money and improve efficiencies within your business. Let’s get deeper into these common purchasing mistakes, and see how you can best go about fixing them.
Let’s explore the 3 most common purchasing mistakes.
Being reactive to purchasing
Many construction companies order material in a reactive manner. Onsite material requirements can drive this reactive behaviour and then leads to poor procurement tracking and traceability, and ultimately can result in increased costs.
The individuals responsible for purchasing in a company are often being led by on site management when it comes to material ordering, this results in administrative issues. It’s important that this reactive type of onsite behaviour is controlled, and this is normally done by introducing a purchasing process and software to deal with the problem. How do you avoid reactive purchasing?
A: By Planning. Planning in purchasing starts the day a company gets the project go ahead. The day companies know ‘we’re going to be on a project’ , is the day that they should start planning for purchasing.
B: By centralising purchasing (through Finance or administration). In this case all purchasing is validated and approved via a P/O system, which in turn prevents reactive behaviour. They should have a process that everybody in the company understands. ‘This is how we buy, this is the cycle that we’ve got to go through’. Everyone understands it, from the business owner, to project manager, to contracts managers, to site manager, to foremen, to whoever it is that’s involved in getting materials to site. They all know that there is a process that has to be followed.
Dealing with a 3 way match
The second mistake is how to deal with what we call a three-way match. First of all, let’s explain the three-way match. Three-way match is something that most in accounts payable would be very aware of. Three-way match means, when an invoice lands into a company, the company must match an original P/O with the goods received notice or the delivery docket, and those three documents are pieced together to have a three-way match which triggers the approval.
Some companies have a requisition process , which can be as simple as a text message saying, ‘I need x, y, z on site by Friday’ , back to someone in the office. Some companies have this process completely digitized, whereby information comes back from site digitally. It’s then approved and flipped to a purchase order. Either way, they have a method of getting the information that they need from site to somebody that has the power or the permission to approve the purchase.
Depending on the order size or type, an RFQ (request for quotation) process may also kick in. A lot of companies are using RFQ processes because of day to day material price fluctuations. They can’t rely on yesterday’s price anymore as prices are fluctuating from one day to another. The three-way match becomes even more important in these circumstances.
The problem is time. The matching process is manual, and requires gathering documents, matching them, validating them and approving them. This can be extremely time consuming and subject to administrative error. To avoid this mistake some companies are using automation software. The software manages the process and cuts down on costly errors and administrative time. The software can be something as simple as excel or a construction software package that manages Invoices, P/0s and deliveries. Invoice automation has been around a long time. Data shows that, should a company automate invoice processing, they are looking at an 80% saving of administrative time, allowing personnel to focus on higher level tasks within that business, not attaching documents together. That’s significant and a clear cost saving for our companies.
Purchasing not being project centric
The third mistake is purchasing not being project centric. A lot of companies say they have a purchase order system, but sometimes it’s not much of a system at all. Purchasing is taking place, maybe in a paper based system, maybe it’s being done in a digitized system, but more often than not it just doesn’t have the connection to the project and doesn’t have a connection to what’s really happening on site.
Often some companies use email to track who is ordering what. They either folder or print the emails to keep a track of what was ordered. Other approaches use excel to log orders, but really none of these approaches provide construction companies with what they really need, which is to connect purchases directly to projects, and provide insight into project costs v budgets, not to mention validating material pricing on invoices. The associated costs of non-project centric purchasing can be significant, and project profitability can slip away unchecked.
LiveCosts, set up a very simple system traffic light system to manage construction project purchases. When a purchase is made by a company for a particular project, those costs are given an amber status. Amber status means the purchase has been made but the invoice has not been received. This means that you have a record of the purchase and what you expect to be invoiced against that project. Once the invoice is received. it’s validated against the purchase amber record and if it all matches the record goes to green status. Green meaning purchase and invoice are matched and validated. If it doesn’t match it goes to red status, meaning it’s not validated and needs further validation. So the traffic light system provides a measure of visible committed cost by project. It can be seen, which means the construction company is never waiting on the supplier to issue an invoice on their time and on their terms.
In general, construction companies have been slower to adopt automated systems to help manage project materials purchasing. Manual systems do not provide the checks and balances required to maximise profitability and minimise costs. Automation can address many of the top mistakes, save you time and increase profitability.