| The Profit Leverage Effect in purchasing tells us that if | | | | purchased costs will result in a three percent impact on |
| your organization must find ways to reduce or contain | | | | net income ~ (.05 X 60% = 3%). This will boost your |
| costs, the best place to start is in the Purchasing | | | | profits up to 8% from 5%, resulting in a 60% increase |
| function. This is because a high percent of many | | | | in profits. In conclusion, a 5% reduction in purchase |
| organizations' total costs are in purchased goods and | | | | costs will result in a 60% increase to profits. |
| services. When cost containment becomes a strategic | | | | Reducing your procurement costs will also help your |
| necessity, whether due to reduced sales or revenues, | | | | company in a highly price competitive market. Your |
| high labor costs, or other factors, companies too often | | | | company most likely will be losing margin as lower |
| focus on cutting costs in areas such as labor and | | | | prices are required to compete in your market. If you |
| overhead rather than on purchasing. It is too often | | | | can reduce your purchasing costs, then you will be |
| assumed that it is easier to implement job cuts than it | | | | able to lower prices without losing your profit margin. |
| is to reduce purchasing costs. | | | | Fortunately, e-sourcing technologies like reverse |
| For example, as an industry average, 60% of all sales | | | | auctions have become affordable, easy to implement, |
| dollars are spent on purchased materials, and | | | | and are being used by mid-market and small |
| therefore, small changes in the cost of purchased | | | | organizations to control purchasing costs. |
| materials result in large changes to profit. So if your | | | | While reverse auctions cannot be used to procure |
| business spends 10% of the revenues on labor and | | | | everything, they can make a positive impact in the |
| salaries and 25% on overhead, then your profit is an | | | | profitability of your company without implementing |
| industry average of 5%. A five percent reduction in | | | | painful decisions. |