PSMJ Resources, Inc. – Conventional wisdom says that it’s always cheaper to buy construction materials in bulk. In the real world, you have to decide whether the cost of keeping inventory would offset your bulk purchase savings. In these five scenarios, bulk purchasing can slash overall costs and stretch bigger margins from your jobs.
1. YOU CAN AFFORD THE UPFRONT EXPENSE
A volume purchase requires a big initial cash outlay. Be certain that you have either the bank balance or the credit line to invest in a big transaction. As the old saying goes, “Profit is vanity, but cash is sanity.” You need enough cash on-hand for vital outflows, including wages, installment payments for equipment, and insurance.
Bulk purchases are a great way to get financially healthier, but only when you’re already pretty healthy. There’s a good chance your bulk purchase could result in long-term savings, but there’s no guarantee that it will. Start by finding ways to save money by making changes that cost nothing. Try negotiating prices with suppliers — at your current order volume — or making a push to collect outstanding receivables.
2. YOU HAVE MULTIPLE ONGOING PROJECTS WITH SIMILAR REQUIREMENTS
If you’re building multiple office buildings that will use the same basic supplies, such as the same door frame and door combinations, then buying enough supplies for all ongoing projects makes great financial sense. In addition to buying for current projects, forecast how many similar projects you’ll complete in the future based on how many you’ve completed in the past. If you’re reasonably sure that you can predict future needs, buy more for a larger discount.
Again, you don’t want to make a bulk purchase by relying on your hope for future projects. Buy enough that you’re in line with last year’s levels or last quarter’s levels, but don’t start buying in anticipation of future growth. Make sure that you have adequate storage space for all of your ongoing projects. If you do, maintaining your own inventory will save man-hours by eliminating repeated trips to the hardware store.
3. YOU CAN INFLUENCE PROJECT SPECS TO MATCH YOUR INVENTORY
When you’re storing a lot of inventory, you have to make sure it gets used. Moving inventory means thinking proactively when discussing project specs with your clients.
If you’re mostly working on projects that have generic specs, or if you know you have sway with a client, it’s okay to figure those projects into your materials purchase forecasts. Alternatively, if you’re working on projects with a lot of customized specs, hold off on bulk buying anything but the most generic materials.
4. YOUR STORAGE COSTS ARE LOW
Storage isn’t just about having enough space. It’s about ensuring that your space — and your cash — can’t be put to a better use. Before you opt for bulk purchasing, consider these costs associated with holding inventory:
- Capital costs. If your capital is tied up in inventory instead of being liquid, you might miss out on certain opportunities. For example, you might forfeit interest or investment gains by tying up cash in materials.
- Deterioration. When products have an expiration date, or they can’t withstand warehouse conditions for long, only purchase what you can use before they deteriorate.
- Shrinkage. Operational errors, breakage, and even internal theft can affect your on-hand inventory. Anticipate a certain amount of shrinkage, and figure it into your materials cost.
- Handling. Consider the cost of moving materials from the warehouse to the job site as well as the cost of moving materials from the supplier to your warehouse.
- Obsolescence. Sometimes, a client changes project specs at the last minute, and some of your inventory becomes obsolete. Look over your old projects to find out how often this has happened in the past, and calculate a fixed obsolescence cost into your inventory projections.
5. YOU HAVE AN ORGANIZED MATERIALS MANAGEMENT SYSTEM
Before you start warehousing bulk purchases, invest in a good materials management system. Combine good technology with thoughtful procedures, and train your people to follow them closely.
To deter theft and monitor warehouse conditions, consider investing in CCTV. Also, figure in the payroll costs associated with taking a regular physical inventory.
Once you’re in good financial shape, bulk buying becomes an accelerator for your growth. With smart purchasing and inventory management, you’ll see big returns from buying in bulk.