PurchTips edition #50

Here are four distinct profit center models used today…

Model #1: This most simplistic model simply recognizes the fact that purchasing savings contributes to higher profits. The purchasing department may report corporate net income and illustrate how it would have been lower if it were not for purchasing’s actions.

Model #2: This model also recognizes savings but, in addition, sets purchasing’s budget (for supplies, equipment, salaries, etc.) based upon savings in a year. In addition, purchasing may also negotiate rebates from suppliers and use those rebates towards its budget.

Model #3: This model is used where a parent company has several subsidiaries or franchises. The parent company’s purchasing department “markets” itself to the subsidiaries or franchisees who pay for the purchasing department to execute projects like spend analyses, RFP’s, negotiations, and so forth. The subsidiaries or franchisees have a customer/vendor relationship with purchasing and are not obligated to use their services.

Model #4: This is the most controversial model. A purchasing department will work on initiatives for the success of its own organization, developing techniques, tools, technologies, etc. in the process. Then, after successful internal implementation, it will sell to other companies those techniques, tools, technologies, etc. in the form of training, software, and the like.

Why is Model #4 controversial? First of all, organizations have been following the trend to focus on core competencies and divest the rest. Therefore, if a pharmaceutical company wants to focus on selling medications, it may choose to abandon the selling of purchasing software. Second, if your responsibilities are split between executing the purchasing function and developing and selling services, your interest in doing an excellent job at purchasing may be diluted to the point of being dispensable. Third, can you imagine the result if you taught your suppliers your negotiating secrets? (lapress.org)

Model #4 may work for some. Our advice? Don’t try Model #4 “at home” unless you have an inseparable relationship with your organization’s top management.

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