Understanding the Savings Generated by Enterprise-Purchased GNFR
There are often significant savings when an enterprise purchases GNFR capital goods rather than a contractor for a couple of reasons. In this case, we are defining “enterprise” as any large business with multiple locations, such as a large retail or restaurant chain; regardless, this enterprise has massive purchasing power.
What Is the Difference Between Enterprise-Purchased and Contractor-Purchased Goods?
Enterprise-purchased goods are those purchased by the procurement department of this large corporation. Most companies either don’t have the structure to support detailed purchases for thousands of projects or don’t have the correct software. Through enterprise purchasing, the company can expect to receive large bulk discounts, and they will avoid GC (general contractor) markup. However, without the correct software, the savings can be severely limited due to the costs associated with coordinating the delivery and resolving conflicts between the suppliers and contractor.
Contractor-purchased goods are those purchased by the GC contracted for that specific project. Contractors profit from selling the construction materials to their customers. For larger bulk purchases, the enterprise will have negotiated rates. If the contractors are doing the detailed purchasing of these goods, then typically they’d apply a markup to the purchased goods, which is usually a fixed percentage.
Enterprises must compare the costs of an internal indirect procurement department to the handing fees that are added with the contractor markup. Most of the time, enterprise-purchased items only make sense with bigger-ticket items or large purchase quantities for which the enterprise can exert their buying power for significant savings.
Risks of Enterprise-Purchased Internal GNFR
While enterprise-purchased goods are the best choice when there are significant savings, there are certainly a few risks and concerns to be aware of. The enterprise could cause project delays due to mismanaging ordering the goods. Contractors like to order their own supplies because they know exactly what they need. If a communication problem or mistake arises between any of the three parties involved, there could be wrong or neglected orders, causing delays or other significant errors.
Delivery schedule issues can also arise when the enterprise is involved. Timing is everything in construction, and if the enterprise fails to coordinate delivery, there could be significant issues and delays in the entire process. This could create added costs for the enterprise since it might add additional labor and time to the project.
Some contractors may not want to work with enterprises that are purchasing their own materials. Contractors prefer to purchase materials because they’ll have exactly what they need. And they’ll be able to charge a service fee for procurement. Having a conversation about material sourcing before you hire your contractor is crucial in order to head off potential disasters or disagreements.
Conflict resolution between the contractor and supplier is also a common issue. Because the enterprise is involved in the process, the enterprise might become a mediator in certain instances, which makes communication challenging. This could also add unnecessary time and labor to a project, adding to the final cost.
Avoiding Potential Purchasing Issues
Without a software package to digitize supplier take-off quotes and manage enterprise-purchased goods scheduling, it will be extremely difficult to avoid these purchasing issues. It is important to take some necessary steps to ensure that the correct goods are purchased by the enterprise and scheduled by the contractor. To do so requires a few key strategies.
First, identify the goods where the enterprise can generate significant savings and leave the other purchases to the contractor. Most of the time, these cost savings will include volume purchase commitments, potentially including third-party warehousing. In this instance, the enterprise can usually control these warehouses, but these costs need to be examined thoroughly ahead of time.
It is also a good idea to implement risk-management systems to head off potential problems for enterprise-purchased GNFR. This system should be one that has something in place to allow the contractor to manage the supplier delivery schedule and keep an accurate log of all interactions involving the contractor, supplier, and enterprise so that conflicts can be efficiently and effectively resolved.
The system should also include a way to calculate costs efficiently. This should include savings of the actual goods in addition to any delivery or administrative fees a business might incur.
In deciding whether the contractor or enterprise should purchase GNFR for construction or repair, it is always best to assess the enterprise’s buyer power, internal structure to support the purchases, and software systems required to determine the best course of action. Also, when hiring a contractor, it is important to pick contractors who are willing to accept projects with enterprise-purchased goods since some contractors may be less inclined to work with materials they are not able to purchase themselves. Always weigh the pros and cons and calculate the costs for each scenario to make sure you are getting the most significant savings. Every purchase has risks and benefits, so make sure you are weighing the difference.
Lumatrak provides a full range of real-time OTIF visibility tools to help you better manage supplier and delivery performance from order to the final mile of your indirect goods supply chain. Provided in the cloud through its Software-as-a-Service (SaaS) offering and already connected to vast number of manufacturers and contractors, Lumatrak’s solution can be quickly implemented to complement and enhance any ERP, Strategic Sourcing and Procure-to-Pay systems.
To learn more about how a better GNFR-delivery management solution could save your company both time and money, contact the team at Lumatrak today.