Tag Archives | purchasing

Overhead Expense Reduction

See Also:
Predetermined Overhead Rate
Activity Based Costing vs Traditional Costing
Activity Based Cost Allocation
Standard Cost

Overhead Expense Reduction

As a general precursor to Overhead expense reduction, Group Purchasing Organizations, Co-ops and Consortiums always lead to lower prices because they aggregate spends and create buying power. This may be true for smaller spends but as spends get larger ($100,000+ annually), you will often do better on your own when a supplier can customize a program to your specific purchasing patterns and needs.

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Category Specific Expertise

In reducing overhead expenses, expertise in purchasing for one cost category or in the request for proposal process will produce similar results in another cost category. What expertise in purchasing really means is an understanding of the unique data requirements and what drives supplier pricing to achieve the best results. You may use the same process in different categories. But without the category specific information, the results may not be the same at all.

Category specific information includes changes in the industry, contract nuances, and benchmark data.

Stay Loyal to The Supplier

Loyalty to a supplier always translates into the best value for your company (value = price + service) as well as the best opportunity to reduce overhead expenses. Quite often, long time loyalty leads to complacency from both the supplier and the purchaser. Industries and companies change over time and vendors providing operating supplies and services are no exception. Modest price increases year after year may seem acceptable when in reality the market may have changed, and the cost should actually be going down year after year. Compounding increases add up over the years.

How To Reduce Overhead Expenses

There are three things that you can do to reduce overhead expenses:

  1. Lower Costs with Incumbent Suppliers
  2. Ask Vendors to Help Manage Spend
  3. Create a Competitive Environment for Each Category

Lower Costs With Incumbent Suppliers

Ask your incumbent suppliers what you can do that will result in lower costs from them. Lower Cost can lead to a smaller Overhead-Rate which ultimately can lead to a reduction in overhead expenses. Work with your vendor as a team member – not as an adversary. If you can change a process or an ordering habit in your organization that reduces your vendor’s expense, then your vendor should reward you with lower prices which can lead to reduced overhead expenses.

Ask Vendor to Help Manage Spend

Then, ask your vendor to help you manage the spend. A proactive approach must be taken to reduce overhead expense. Are you leveraging the vendor’s platforms for ordering and managing information? Or can they track purchases by department and provide invoices already allocated to departments to ease the work of your Accounting Department? Can they inform you if employees do not follow established business rules (e.g., buy-off contract)? Do they have the technology to prevent your employees from buying off contract without proper approval?

Create Competitive Environment for Each Category

Finally, create a competitive environment for each category. Let your team and vendors know that there are no “sacred cows“. Have someone other than the supplier’s daily contact manage the expense review process. This enables greater objectivity and keeps personal relationships out of the process. Then give suppliers all of the information they need to sharpen their pencils and minimize their risk. The more they know about your usage and requirements, the better. Customers who inspire confidence and minimize the suppliers’ risk are rewarded with the most aggressive pricing. Reducing overhead expense requires an understanding of both your personnel, as well as the vendor’s.

When you know your overhead and how much you need to reduce it by, you can add real value to your organization.

The CEO's Guide to Improving Cash Flow

Overhead Expense Reduction

Originally posted by Jim Wilkinson on July 24, 2013. 

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Service Department

See Also:
Administration Expenses
Outsource Definition
Advantages of PEO Services for the Business Owner
Sunk Costs
Joint Costs

Service Department Definition

Many companies require support activities as well as core activities to produce their goods and/or services. Support services, or a service department, do not contribute directly to the production of goods or the providing of services, but they are necessary for the company to operate. In addition, consider service departments, support services, or administrative services support activities.

The costs associated with these support services must be treated in accordance with accepted accounting practices. They also may be allocated to the cost of goods and services produced by the company and/or allocated to other departments within the company. Furthermore, support services costs often comprise a large portion of overhead costs.

Because these activities are not the core activities of the business, managers often must decide whether to keep support service activities in-house or to outsource them. Often an outside organization that specializes in the particular support service in question can perform the activities in a more cost-efficient way. As a result, it may benefit the company to outsource that particular activity.

Service Department Cost Allocation Methods

In accounting, there are several methods for allocating the costs associated with service departments to the products produced by the company and also to the internal departments that benefit from the support services. These cost allocation methods include the following:

Support Services – Examples

Some examples of support service departments that you may commonly find in a company include the following:

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service department, Service Department Definition, Service Department Cost Allocation Methods


Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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How to Manage Inventory

See Also:
Days Inventory Outstanding
Inventory Turnover Ratio
Just In Time Inventory System
Perpetual Inventory System
Supply Chain and Logistics

How to Manage Inventory

Here are some ideas on how to manage inventory.

1. Consider the Costs of Storing Inventory

There is cost in just storing inventory at your or an offsite location. Additionally, there is always a risk of damage or obsolescence. Similarly, theses issues apply to raw materials inventory.

2. Safeguard Inventory

Do you safeguard inventory from theft or damage? It is advisable to do a physical inventory count monthly (more often if loss issues exist). Then compare it to the inventory records.

3. Appropriate Mix of Inventory

Do you have the appropriate mix of inventory on hand for your sales demand? When you closely monitoring anticipated sales, it will help you minimize inventory costs while satisfying demand.

4. Timing of Inventory Purchase

Buying or manufacturing inventory or raw materials before they are needed ties up cash unproductively.

5. Managing Purchase Function

Are you managing your purchasing function? As a result, devoting appropriate resources to purchasing can save money on materials and parts for resale. So, negotiate the best price and buy in bulk when appropriate.

6. Inventory Management System (Managing Inventory)

Create an inventory management system. Then, record each product’s movement as an internal use or sale to a customer. Use the following equation to calculate simple inventory management:

Beginning Inventory + Purchases – Sales or Transfers = Ending Inventory

7. Investigate Differences

If physical inventory count is different from the inventory records, then investigate material differences. Then make corrections to your inventory management process.

8. Assess Inventory Costing Function

Assess your inventory costing function. Depending on the sophistication of your accounting system, inventory transfers may not be handled well for costing purposes. Another common inventory costing problem is invoicing from a negative inventory book balance (sales were recorded before purchases.) In cases like these, inventory costing will be incorrect. Furthermore, a way to correct for an inventory costing problem is to count physical inventory at period end and adjust the value on the balance sheet. The offsetting entry is to cost of goods sold; therefore, this entry should correct both the income statement and the balance sheet.

If you want to better manage your inventory, then click here to access our free KPI Discovery Cheatsheet.

How to manage inventory, managing inventory

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How to manage inventory, managing inventory


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Customer Analysis

See Also:
Customer Relationship Management (CRM)
Segmenting Customers for Profit
Disaster Planning for Information Technology Systems
How to compensate sales staff
How To Train People For Success
Scrap Value

Customer Analysis Definition

The customer analysis definition is the process of analyzing customers and their habits. Customer analysis is one of the most important areas of study in a business. Perform these decision processes in the following 3 stages, assessing:

  • Before the purchase
  • During the purchase
  • After the purchase

Customer Analysis Explanation

Customer analysis, explained as the route to knowing your customers, is one of the most important functions of marketing. Through understanding the customer one can begin to offer services to their needs. Customer analysis, marketing tools included, is a study centered around the buyer.

Before a customer has begun to purchase, marketers analyze several factors. Total market size would form one of the most crucial measurements. From here marketers place high importance on market location, preferences, socioeconomic status, price elasticity towards the product, and more. The focus of this is to understand the existing culture of these people in order to understand the motivating factors of why they are interested in purchasing.

During the purchase, marketers analyze how customers perform in order to focus their attention on the most profitable products of the business. A customer analysis sample in this stage includes buying behavior, total purchase value, influencing factors which motivated the purchase, satisfaction levels during the purchase, and more.

Once the product has been purchased, then the customer analysis matrix takes a different role. Areas of importance at this stage include customer satisfaction, word-of-mouth from the customer, likelihood of additional purchases, and more. The focus here is to measure the effectiveness of the product in order to motivate customers to make repeat purchases, generally.

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Customer Analysis Example

For example, Shay is a marketing analyst with a major marketing firm. She enjoys going to work because she can use both the creative and analytical sides of her personality. She does well at this job.

Recently, she was tasked with customer analysis for one of the firms clients. Shay is to take the research and make strategic assessments from the information. She is excited to begin this project.

Review the Market Factors

She first starts by reviewing the market factors: total market size, location, interest in the product, and more. Through a series of focus groups, surveys, and similar studies, Shay begins to understand how to coerce the customer to interact with the company.

Analyze Customer Habits

Next, she analyzes the habits which the customer displays during the purchase. Shay notes, from the research, that customers are introduced to the company through cheaper products. Eventually, they earn trust to purchase more expensive products. She notes this as she moves forward.

She finally looks at the way a customer acts after buying. The key factor she notices here is word-of-mouth: customers always tell their friends about the good experiences they had from the product. She recognizes the importance of this and plans for maximization of it’s benefit.

Assemble the Report

Shay finally assembles the report. She makes key discoveries in this document. Shay walks away from it knowing what is important: that the market is nationwide, it is relatively unbothered by price increases, is familiar with technology, is more interested in purchasing quality than saving money, and much more. She begins to strategize from this base.

Shay believes that by changing gears the company could further maximize profits. In her report she recommends several things: creation of an online store to offer another channel for sales, adding an additional product line which uses premium pricing, and creating a customer rewards program where previous purchasers who cause friends to buy can reap the benefits of their actions.

She prepares for the meeting to present her new customer analysis business plan. She knows she will have to overcome some resistance but looks forward to the meeting. Shay can bring value through her actions for the company.

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customer analysis, customer analysis example, customer analysis definition

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