Join Eddie Davila for an in-depth discussion in this video Buying the materials, part of Business Fundamentals.
- In business pretty much everything customers enjoy requires some materials. A great meal required delicious ingredients, a movie experience required comfortable seats, even your massage was made better with fragrant nourishing oils. Companies must recognize that every material purchase is an opportunity to improve the product or service provided. Procurement and materials management are the segments to the company that finds suppliers, purchase the materials and then make sure that this inventory is stored and used effectively.
If done right, procurement and materials management can improve customer satisfaction. They can contribute to the company's profitability and by partnering with reliable suppliers they can help the company develop a stable supply chain, they can be counted on to continuously deliver high-quality products and services to the consumer. To illustrate these points, let's use a cell phone as our example product. And actually since we're buying parts for this cell phone, let's consider just one part of the cell phone, the battery.
What does our company need to think about? Let's first consider the consumer. What does the consumer expect? They want value, a long lasting battery at a reasonable price. They probably also want a battery that is safe, a small lightweight battery that won't overheat. If this is what the customer values and if those are the things that we advertised, the battery in some way needs to fulfill the customer's expectations. A great battery helps make our phone better.
A better phone will sell more units and thus, our revenues go up. Now that we made the customers happy, let's remember that revenues alone won't bring us a profit. We need to consider our company's needs. The company needs to control cost. While we're buying great batteries for our customers, we have to know what the total cost of purchasing these batteries will be. I'm not just talking about the per unit cost. You must consider the total cost of these batteries.
The cost of storing batteries, cost associated with theft and damage, the cost of negotiating and placing orders from battery companies. And don't forget that someone needs to pay for the delivery of those batteries. So if keeping cost low is important to your company, you'll need to remember inventory costs include the costs of buy, hold and order inventory. That brings us to the final party involved in our battery purchase, the supplier. The battery supplier will ultimately dictate battery cost and the quality of the battery.
But they also impact our cell phone company in other ways. If they can fill orders quickly, we can keep low inventory levels. Even if we run out of stock, it won't take long to get a new shipment. For that kind of service though we'll probably have to pay a higher price. On the other hand, a slower supplier may have lower per unit pries, but we'll need to carry more inventory since we have to place orders early just to be sure they'll be able to fill them before we run out of batteries.
This takes care of our battery needs today but how about the next generation of cell phones? We'll need stronger batteries that fit in our new phone design and we still need to control our costs. In modern business, suppliers are business partners. When we sell more phones, they sell more batteries. On the other hand, if they make batteries better, we may sell more phones. Because of this, suppliers and innovative manufacturers must work together to understand the customer, develop new technologies and also to develop manufacturing and logistic strategies.
Whether your company is buying cell phone batteries, tomatoes, theater seats or even massage oils, it needs to consider the customer, the supplier and our company. As you head back to work today, ask yourself these simple questions. Are the customers happy with the materials they buy or use? Do we consider our supplier a partner? Are suppliers involved in helping us develop better products and services? And do we consider the cost of holding inventory or just the cost of purchasing? If your answer to any of those questions is no, you are likely missing an opportunity to maximize your company's potential.
He also reviews the basics of the people side of business: managing employees and developing customer relationships. Last, he covers the financial and information management aspects of business and provides a basic explanation of economics, so that you can understand the relationship of your business to the bigger picture.
Lynda.com is a PMI Registered Education Provider. This course qualifies for professional development units (PDUs). To view the activity and PDU details for this course, click here.
The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.
- Understanding business goals, stakeholders, and resources
- Developing a product or service
- Selling a product or service
- Raising capital
- Managing employees
- Managing customer data
- Understanding finances
- Managing resources
- Understanding economics