One area where profit margins in the Australian construction industry tend to be thin is with materials. This is an area that is out of your control in regard to market trends. However, in regard to how that material is purchased, it is something that you can control. If the price of timber or concrete increases, this has an immediate impact on your bottom line.
Bulk buying is a strategy that is also known as moving away from the “buy-as-you-go” culture. In bulk buying, instead of considering project by project and then ordering the necessary materials accordingly, a company buys a large bulk of necessary materials at one time. The strategy takes advantage of economies of scale and thus results in lower costs. The strategy makes procurement a proactive and strategic act and helps companies control their costs even when experiencing market volatility.
The Financial and Operational Upside
The single biggest advantage of bulk purchases is the cost savings that can be achieved. Suppliers will, in almost all cases, provide a discount in bulk purchases, as such purchases will give them a guaranteed flow of income, as there are also reduced costs on their part, as there will be minimal logistics involved. A small discount on a bulk item may amount to thousands of dollars.
In addition to the savings from the ticket price, purchasing in volume will also save you money through increased efficiency. When you buy materials for projects on smaller volumes, you are essentially picking up the tab for shipping costs, as well as processing various orders. By doing so, you are placing unnecessary work on your procurement staff.
Additionally, having an inventory of critical materials will eliminate any delays that may result from the supply chain. With the current state of affairs, with lead times that may take weeks, having the materials from a bulk roofing screw supplier, for example, will ensure that your crew isn’t waiting for the delivery truck to show up.
Managing the Challenges of Bulk Buying
While it’s clear that the benefit would be significant, going down this route also faces some particular challenges that have to be managed carefully. The most straightforward problem relates to storage. The fact that you will have covered a period of six months in terms of materials that you buy means that you have to have an apt storage facility that is protected from elements such as weather changes.
Another important aspect to consider is cash flow. When a business purchases in bulk, it needs to have a heavy initial working capital outlay. For a small business involved in the construction industry, it might become a constraint to have such a high cash outlay in inventory, as it might impact funding other pressing needs such as labour costs. There might also be a risk of market variability.
To avoid such challenges, construction companies can begin by looking at their past data and seeing what commodities can be relied upon regarding their turnover. The best commodities to buy in bulk are the consumables that are definitely needed and not commodities that are less common. Concerning storage, some suppliers might be able to enter an agreement with you wherein the commodities are sold at a cost that you pay upfront, but they are the ones who hold them within their custody and supply them gradually according to demand.
Building a Stronger Bottom Line
But adopting a bulk purchasing strategy requires a change in mindset as well as effective financial planning on the part of the company. Still, for construction firms in Australia who are seeking ways to boost their profit margins, the added effort may be well worth the cost of doing business differently!
