A structured method for applying purchasing cost management tools.

Managing cost continues to be one of the primary focal points of business today. Purchasing controls a high proportion of costs in most organizations. A recent study indicated that, as a percentage of an organization's revenues, purchasing expenditures averaged 63 percent in manufacturing, 86 percent in wholesale, 78 percent in retail, and 86 percent in utility industries. Even in the general service sector, purchases amount to approximately 25 percent of total costs.[2]

Purchasers know that it is important to manage costs. However, there are many cost management tools and techniques, and they continue to proliferate. Thus, it is difficult to determine which type of analysis should be used in a given situation, and time pressure may impede the purchaser in selecting 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 exploring the following areas:

1. How should purchased items be classified into a framework, so that standard procedures can be developed for analysis of items that fit into certain classifications?

2. What cost analysis techniques best support each classification in the framework?

3. What cost analysis techniques are more strategic in nature, and can really help purchasing add value to the organization?

Each of these questions is discussed in some depth, following a brief review of the relevant literature.