A Structured Method for Applying Purchasing Cost Management Tools

Managing the cost of purchased goods and services continues to be one of the hottest issues in purchasing today. It has received a great deal of attention by top management, and in the press in periodicals such as Fortune and Harvard Business Review. As stated recently in Fortune magazine, “Simple fact: when the goal is boosting profits by dramatically lowering costs, a business should look first to what it buys.” 1 The Fortune article goes on to give a number of suggestions for reducing costs, such as leveraging your buying power; committing to a handful of suppliers; and working together to reduce total cost. These broad suggestions are helpful in providing direction, yet they are not specific enough to help purchasers actually analyze the situations they may face. While buyers know that effectively managing the costs of purchases is important, there are many approaches to cost management. Pressure to complete a particular buy may prevent purchasers from using the right tool for the job. This article proposes a methodology to help purchasers determine what type of cost analysis technique should be applied to a particular purchase by: 1. Developing a framework for classifying purchases 2. Discussing which cost analysis techniques best support each classification in the framework 3. Focusing on strategic cost management techniques