The profit leverage effect on purchasing tells us that if your organization must find ways to reduce or contain costs, the best place to start is in the Procurement function. This is because a high percentage of the total costs of many organizations corresponds to purchased goods and services. When cost containment becomes a strategic need, whether due to reduced sales or revenue, high labor costs, or other factors, companies often focus on reducing costs in areas such as labor and overhead rather than to buy. Too often it is assumed that it is easier to implement job cuts than to reduce purchasing costs.

For example, as an industry average, 60% of all sales dollars are spent on purchased materials, and therefore small changes in the cost of purchased materials lead to large changes in profit. So if your business spends 10% of revenue on labor and wages and 25% on overhead, then your profit is an industry average of 5%. A five percent reduction in purchasing costs will result in a three percent impact on net income ~ (.05 X 60% = 3%). This will increase your earnings up to 8% from 5%, resulting in a 60% increase in earnings. In conclusion, a 5% reduction in purchasing costs will result in a 60% increase in profit.

Lowering your acquisition costs will also help your business in a highly price-competitive market. Your business will most likely lose margin as lower prices are required to compete in your market. If you can reduce your purchasing costs, you will be able to lower prices without losing your profit margin.

Fortunately, electronic sourcing technologies such as reverse auctions have become affordable, easy to implement, and are being used by small and medium-sized organizations to control purchasing costs.

While reverse auctions can’t be used to buy everything, they can have a positive impact on your company’s profitability without making painful decisions.

You can visit eDynaQuote http://www.eDynaQuote.com to see examples of reverse auctions where companies have been successful.