What is the best strategy to adopt when making a Leverage purchase?

Although they do not have great strategic value, Leverage Purchases involve risks for the business. They must therefore be the subject of an effective and adapted purchasing strategy. Leverage purchases are products that represent a high percentage of the buyer's profitability and where there are a lot of suppliers available. This makes it easy to change suppliers and quality is often standardized. However, this facility can also make some of the buyer's tasks complex. It is therefore necessary to define a relevant Leverage purchasing strategy. In this article, find out what is the best strategy to adopt for Leverage purchases.

What is Leverage purchase?

Based on the Kraljic matrix, we can distinguish four categories of purchases according to their financial impact and the complexity of the supplier market: leveraged purchases, strategic purchases, simple purchases and Leverage purchases.

• Leverage purchasing: these are purchases that represent a high financial impact for the company and where the supplier offer is broad. So procurement is simple. Because buyers can negotiate with suppliers, they allow businesses to make attractive gains.
• Simple purchases: these are products or services that represent a relatively low financial commitment for the company and that are easy to obtain. There is a low level of interdependence between the buyer and the supplier. There is therefore a certain balance between the bargaining power of the purchasing manager and the supplier himself.
• Strategic purchases: these are key or differentiating purchases for the company. We also talk about rare resources. They represent major financial challenges for the company. It is generally difficult to obtain them due to a limited supplier market. The ideal strategy is to create a long-term relationship or partnership with the supplier.
• Leverage
• purchases: these are products or services that do not have great strategic value for the company. Their supply can be complex, because we are facing a market with a low number of players. So we are often in a monopoly situation.

Thus, Leverage purchases are those that have a moderate financial impact on the company, but whose procurement remains complicated. This leads to relatively high supplier risks. Because of this, Leverage procurement needs to receive increased attention from procurement managers. They must define an effective and relevant purchasing strategy that reduces risks by securing quantities and stocks.

To achieve this, they will have to rely on trusted partners who are able to control the entire operation, from the choice of raw materials or goods to product returns. In other words, they must be in a position to guarantee the origin or composition of their products, compliance with current standards and secure supplies.

Securing Leverage purchases has a significant impact on overall business performance. As such, buyers will have every interest in mapping this type of purchase.

Strategy: exploitation of purchasing power, certifying (and activating) several suppliers

As with any procurement strategy definition process, the development of a relevant strategy for Leverage procurement begins with the selection of suppliers. This phase also includes the certification of suppliers. It will be necessary to certify several suppliers.

Approval is a process by which a company recognizes a supplier as being able to meet its requirements in terms of quality, cost, and time. He will therefore be able to benefit from a privileged relationship with her.

Approval is the prerequisite for optimizing Leverage purchases. As quality is standardized, it should be possible to simplify the certification process.

Once suppliers are approved, you must have the rigor to leave them with a minimum of activities, even if they are not always the most competitive, so that your entire organization always knows how to manage the supplier. Remember that managing a supplier is an exercise in organizational intelligence. It's not just about the purchasing department.

Consult as often as possible

Since these are purchases that have a strong impact on the company's profit, it is necessary to maintain the most competitive climate possible.

These products are very often cyclical. They follow the law of supply and demand, that is, prices rise and fall regularly. You need to keep up to date with trends all the time.

It is therefore not on this wallet that you will sign multi-year contracts with suppliers. Eventually, you can profitably negotiate year-end discount schemes (RFA). However, the duration of the contractual relationship must always be free to be able to adapt to all situations. For this purpose, it is important to consult as often as possible.

Know the price indexes

If you have a large portfolio of Leverage purchases, it is advisable to subscribe to a price database. You'll track which commodity has the greatest cost leverage. Among these, we can mention:

• Ethylene for PVC resins;
• Paper pulp;
• electro-zinc-plated sheet;
• The barrel of oil;
• etc.

In some industries, buyers fill in a mercurial at regular intervals. This is a list of products for which they provide either the price in absolute value or the price on a 100 basis at a given date.

Examples of Leverage purchases:

Leverage products are class A products.

From one company to another, some purchases will change from simple purchases to Leverage purchases or vice versa depending on the amount of purchases made.

• Fuel for a transport company: it will clearly be a Leverage purchase while it will be a simple purchase for a company that has only one truck to shuttle between two industrial sites 20 kilometers away.
• The conveniences of the chemical industry, which will be classified as “Leverage” for a paint manufacturer
• Some standard memories in electronics
• Standard paper for a printer
• Cardboard packaging in a manufacturing industry

Management of the purchasing function: what buyer profile for Leverage purchases?

The juniors

The advantages of this type of purchase for a junior buyer are obvious:

• Very close negotiation cycles, which make it possible to test and correct very quickly.

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• Buying can also be learned by empiricism, Leverage purchases are an opportunity to speed up time;

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• motivating financial challenges whose impacts you can measure in real time;

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• regular contacts with the procurement department

Good collaboration with the procurement department is a core competence of the buyer.

Careful!

Leverage purchases are often subject to the law of supply and demand and are subject to significant price variations. Juniors may lack discernment both in bullish and bearish periods.

Are the benefits the same for the business?

The big advantage of Leverage purchases and their short negotiation cycle is that they allow for quick control of the buyer's results.

Entrusting Leverage purchases to a junior is a good practice.

Given the warning above concerning price variations, the condition for success is that the junior is not left to his own devices and that he can very frequently check in with a senior buyer or his line manager.

Seniors

Of course, seniors are the most agile when it comes to Leverage purchases. They do a great job on this type of purchase. They have more experience than junior buyers. They have experienced several bull and bear cycles.

They are therefore capable of:

— adapt their behavior:

— anticipate trends;

— identify certain signs of change in trend

Careful! The frequency of consultations creates both great pressure on the relationship and at the same time a certain familiarity between people. The purchasing professional and his line manager must remain vigilant and lucid about the nature and quality of the relationship between people.

• First principle: your hierarchy does not expect you to be liked or hated by your suppliers. It asks you to be respected.
• 2nd principle: contracts are made from legal person to legal person.

You should always keep in mind that you are speaking on behalf of this legal entity.

Establishing a fairly rapid turnover of buyers on Leverage purchases is a good practice.

The purchasing delegation

Purchasing delegation is not recommended at all in the case of Leverage purchases. We are in the natural field of purchasing.

If, in your organization, the procurement department reports to the purchasing department, then an “procurement” manager may receive a procurement delegation on certain Leverage purchases.

You should know that in the context of this mission, he is above all a buyer and not a logistician.

Conclusion

The key word for Leverage purchases is: consultation.

The challenge is to always stick to the market price in order not to have a competitive disadvantage?

Leverage procurement management requires a lot of responsiveness and knowledge of market mechanisms.