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Purchasing - Part 1: Purchasing in ecommerce

When it comes to managing your costs, is there anything more important than the purchasing price you pay for your products? The majority of companies in multi channel ecommerce businesses are buying products from suppliers which they then sell on to their customers.  They’re not manufacturing them. In many cases then, the price you pay for an item – which you need to sell on at a considerable margin in order to make money at the end of the day – is your single most substantial cost. The other costs that turn your gross margin into net margin pale by comparison.

It follows, then, that the most successful companies are those who can command the best prices for good, reliable products that they then distribute to customers quickly and efficiently. It’s easy to see why sellers often jealously guard the names and details of their suppliers.

Purchasing is an industry in its own right. It covers a multitude of areas in the spend business, from sourcing through to procurement, purchase order management, contract management and supplier management. It is a truly global business. The days are gone when you had to rely on 3 quotes from your 3 local suppliers. Now you can buy your products from anywhere in the world and even when you factor in the shipping costs to deliver the products you can still get great deals.

 

Supplier reliability

Even though price is extremely important, it’s not the ‘be all and end all’ of purchasing. Another area is the reliability of your suppliers. Do they deliver when they say they will? Do they deliver what they say they will? Do they give you accurate figures for the stock they have left, and accurate lead times for getting the products to you? What’s the reliability of the products they supply you with? What’s the reliability of the information on the products that they supply? In what format do they send you the data? How much work do you need to do with that data in order to get their products into your warehousing system and get them listed on the various marketplaces?

Much of the purchase power that sellers can exercise over their suppliers comes down to the power of information sellers have on the performance of their business. They need to know which items are selling well. They need to know how quickly those items are selling and what the lead times are for getting more in so that they don’t run out. They also need to know the items that are not selling, where the dead stock is and how long items have languished without moving. They need to understand the percentage of items that are being returned because they’re faulty, not performing as advertised or the wrong item. They also need to be able to analyse and report on this across suppliers and regions.

 

Managing the purchasing process

An additional major headache is the management of the purchase process and the accompanying purchase orders and documentation. Purchasing needs an organised approach. You need to achieve the right balance between having enough stock in and carrying too much stock for all your items, each of which sell at different rates. You need to have your lead times under control, and make sure orders and re-orders don’t get forgotten, leaving you with no stock to sell or exposing you to over-selling situations which threaten your seller ratings and status in your key marketplaces like Amazon and eBay.

Adding an extra dimension of complexity to purchasing are the different business strategies that ecommerce companies can take. Many of our customers use drop-shipping arrangements where the supplier does the order fulfillment and dispatch for the seller. This is a great way to broaden your offerings but sellers still need to agree the various components that make up the purchasing agreement. Some of our customers also do back ordering, where they adopt a ‘just in time’ approach and bring in a percentage of the items to fulfill orders as they come in.  Again, this has the advantage of minimising the amount of stock being carried, but places additional demands on the purchasing side of the things.

If you’d like to read more about Purchasing best practice, please visit our Purchasing Lever page.