Accounting - Purchasing/Cost Control
Getting Rock-Bottom Costs

Getting Rock-Bottom Costs

Low Costs Allow Room for Mistakes!
A really low cost structure is one of the most important competitive weapons a business can have at its disposal. It has certainly been important for me. For years my business was terribly undercapitalized, and I was often testing my bank's patience. On top of that, I was always making mistakes. Ad campaigns that didn't sell, products that the market spit back at us, a customer who one year returned virtually all of a half-million dollars in purchases, even entire business units that failed--you name the mistake, I probably made it and more than once!

But our low cost structure gave us a lot of leeway for making errors, and it still allowed us to make money and repay our bank loans, more or less when they were due.

Narrowly Focus Your Cost Reviews!
To get competitive advantage of a low cost structure, I don't mean a percentage point or two below the industry average. I mean ten or fifteen percentage points below.

From time to time you should carefully examine every single cost you incur. Not all at once--it's too overwhelming. But instead, review costs in one small part of your business at a time.

Don't just focus on renegotiating prices or getting more bids. Think about every way possible to reduce the cost or, ideally, eliminate it altogether. You'll find that if you focus on just one item at a time, you'll often be able to come up with some really creative solutions.

Running a small company, I never had much purchasing power with vendors--but in hindsight it was probably to my advantage, since I was forced to focus on more creative, and potentially more substantial, ways to reduce costs.

Four Steps to Lower Costs
Here's a simple four-step process for lowering costs:

1. Try to redesign the product or process to eliminate the cost entirely.
2. Try to change the specs to reduce the costs to the vendor supplying the goods or service.
3. Try to standardize the specifications or change the delivery schedule to increase volume buying capability.
4. Seek bids and negotiate.

Last year in the book industry, paper prices skyrocketed. We tried to eliminate paper altogether by launching electronic products. For books, we changed our paper specifications, typically from fifty- to thirty-five-pound paper, saving 30 percent in tonnage. Finally, we began buying paper by the carload and negotiated prices aggressively.

Lower Costs Is Not Just Negotiating!
It's hard to get other people to shift their cost-control efforts beyond price negotiation.

For example, my operations manager used to perennially complain about the increasing price of cardstock, trying to get me ready to accept an increase in his box budget. I knew he was doing a great job negotiating prices, but our costs were still poised to rise, and I don't like rising costs.

So I pushed him to look for additional solutions, such as reusing more of the boxes printers used to ship books to us, changing the assortment of boxes we use, and substituting padded envelopes for boxes on smaller-sized shipments.

At the same time, my marketing department was spending more and more money on counter displays--all of which we ship inside cardboard boxes. So I encouraged my marketing and operations managers to get together and design prepacks or self-shippers in order to eliminate the cost of a separate shipping box.

Prices Are Always Negotiable!
Here are a few suggestions that have worked for me in negotiating lower prices:

• Get lots of competing bids for exactly the same specs.
• Set a target price. For example, when buying a year-long service that had a standard price of $25,000 per month, I told the vendor we'd pay $10,000, period. We saved $180,000.
• Change the classification. In buying advertising from a huge media corporation that is notorious for not going off their rate card, I nonetheless insisted on a special deal. They got my business by creating a whole new low-rate category for which only our firm qualified.
• Charm the people at the vendor you are buying from--get them on your side, pushing the decision makers for a lower rate.
• Demonstrate that you will definitely buy now, given a great price.
• Always be prepared to walk if you don't get exactly the deal you want.