Developing an Effective Purchasing Policy in Russia
If a company does not have a properly implemented purchasing policy, it may end up paying too much money for low quality goods, or choose suppliers that are not reliable or do not offer the appropriate level of customer service.
In order to keep costs under control, companies need to buy the right quality and quantity of goods and services at the best possible price, and at the appropriate time from the ideal vendor.
By appointing one department (or a person in smaller businesses) to manage purchasing activities, the likelihood of properly performing the above increases.
However, before delegating the purchasing function to either a department or a manager, a company should consider the following aspects (to be recognized in their purchasing policy):
- Who has the authority to purchase items for the company?
- What items can that manager purchase without additional approval? What are approval levels for different kinds of supplies?
- What criteria will be used to select possible suppliers? How to proceed with tenders and further negotiations?
- What are the business processes for the purchase manager’s cooperation with other departments regarding ordering supplies, reviewing contracts, paying suppliers, and signing documents?
There should be a proper segregation of duties for the following transactions: placing an internal order, purchasing, receiving, and payment.
The policy should foresee the cost limit of purchases that may be made without major formalities, such as contract signing, based on an invoice and delivery note/act of services acceptance.
A goods purchasing system will help to maintain satisfactory supplier relations, improve cash management, aid in inventory control, and increase the overall profitability of the company.
For purchases planning, the following factors should be considered:
- Values of required purchases, particularly to expensive ones (eg. servers), as more money will be tied up in a given type of inventory product.
- Some items may have a low cost, but are purchased in high volume. In such a case, higher priority may need to be given to these items despite the fact that their unit cost is fairly low.
- In addition to the cost of the purchased goods, the internal costs of acquiring and storing inventory (warehousing costs, etc.) should be taken into account.
- The time between ordering and receiving an item should also be considered. If an item has a long lead time, it should be ordered in advance and checks made on its delivery status.
Comparison of suppliers’ offers and discounts
For choosing the best supplier, one should contact a number of different companies and compare their prices, terms of payment, delivery options, and related expenses. It is recommended to avoid relying on suppliers’ websites, and always request quotes in writing for further analysis. Tools such as Excel can be used for comparing prices from different sources. It may turn out that savings on major items (e.g. desktops, monitors) will be outweighed by overpriced minor items (such as computer parts).
Many suppliers offer quantity discounts: the more units purchased, the less paid per unit. These discounts can apply to individual purchases or to a specific group of purchases made over time. Make sure to apply for relevant special offers and customer loyalty programs, and ask for a discount when renewing a contract for the next year!
Taking into account the specifics of the Russian market, security checks of potential suppliers are recommended. It is necessary not only to protect the company from being cheated on deliveries, but to decrease the tax risks related to deductibility of expenses on purchases. In case a supplier is treated by the tax authorities as a dishonest taxpayer, input VAT (18 percent) and profit tax deductibility (20 percent) will be challenged, thus increasing costs. Companies should therefore take care that best price offers do not come from “grey” or recently registered organizations. Examples of relevant security questions include:
- Has the supplier existed for more than one year?
- Is the number of companies held by the supplier’s General Director less than five?
- Is the supplier’s legal address a “non-mass registration” one?
- Was there a lack of any negative information about the supplier on the first two pages of Google search results?
The answer to the above should be yes in each case.
It is also highly recommended that agreements with suppliers with a value of more than an agreed level are subject to legal review in terms of compliance with Russian legislation and group standards, and an assessment of tax implications also be made. The legal review is to be performed after the supplier is selected and checked by a security specialist prior to the contract’s signing.
Dealing with suppliers
It may be necessary to use a variety of suppliers when many different products are needed. Even if a single supplier can meet all needs at reasonable prices, it can still be prescient to diversify one’s supplier base in order to avoid dependency on one partner. One should also keep in contact with other suppliers, and watch out for new ones – getting an offer from a potential new supplier will enhance negotiating power with the current one. If the primary supplier ever fails to ship goods on time, suspends operations, or starts offering a poor service, alternatives are readily available to use as a back-up. Having a back-up for the most critical services like telephone and internet should be included in contingency plans.
Suppliers should be evaluated not only before an order is placed, but also need to regularly re-evaluate. The following should be considered:
- Timeliness and completeness of deliveries
- Quality of items delivered
- Quality of customer service and expertise of technical staff
- Price competitiveness
- Ability to meet design specifications
With Russia’s emerging trend of reaching out to new markets in Asia, in addition to the complexities of tax treatments under the Eurasian Economic Union, purchasing in Russia is becoming more systematically complex. Added to this the upcoming FIFA World Cup Finals being held in Russia next year, foreign investors need to exercise good management and administration protocols to operate an efficient and effective purchasing system and to track this accordingly.
Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Eurasian region. We maintain offices in Moscow and St.Petersburg through our Russian partner firm, as well as our own offices in China, South-East Asia and India. For assistance with Russian issues or investments into Russia and Asia, please contact us at firstname.lastname@example.org or visit us at www.dezshira.com
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