Bridging the disconnect between finance and purchasing (Part 6): Cooking up a better P/E Ratio

Posted on September 20, 2011


Market researchers at the university’s Food Processing Center surveyed members of the Chefs Collaborative, a national network of food service professionals that promotes sustainable cuisine by using local, seasonal and specialty ingredients.  The poll targeted those primarily responsible for food purchases at their establishments, mostly chefs.

Nearly three-fourths of the respondents agreed that buying locally grown food products can be profitable for food service establishments.  When it comes to purchasing, 57 percent would prefer to buy direct from a farmer.

From the article Buying Local Produce Can Boost Profits for Chefs and Growers, NU Survey Shows

The one aspect of this series on bridging the disconnect between finance and purchasing that I really enjoy is the demands it places on me as both a writer and a purchasing professional in that you really have to think outside of the box that comes with the familiarity of having been in the profession for years.

As indicated in the opening paragraph for Part 5 in which an excerpt from an HBR article made the observation that many purchasing managers’ skills and outlooks were formed 20 years ago in an era of relative stability, and lamented that they haven’t changed, nowhere is this truth more evident than in the area of finance.

An enduring byproduct of the siloed functionality in which the invisible partitions of elitism that relegated purchasing to a simple buy at the lowest price exercise is certainly to blame . . . to a certain extent.  Another key factor is the purported absence of the kind of creative thinking that led one executive participant in a 2007 CPO Agenda Roundtable discussion to label the majority of purchasing professionals as dispensable, dime-a-dozen buyers.

In short, and through a combination of internal as well as external factors, purchasing people ultimately limited their focus to the transactional versus strategic and financial aspects of the profession.

With increasing globalization and the at times diverse and complex attributes of managing everything from multiple supply chains to the shifting risk factors centered on issues such as politics and fluctuating currency conditions, having such a limited scope as the HBR article suggests can and often does have calamitous consequences for the enterprise as a whole.

A perfect example of this holistic impact is highlighted by the NU’s Cooperative Extension and Agricultural Research Division’s study referenced in today’s opening paragraph.

Think about it for a moment, by purchasing goods such as produce locally there are, for food service establishments, numerous converging benefits not the least of which is increased profitability.  In addition to direct bottom line benefits, there are also sales and marketing influencers such as being able to promote menu items that feature the freshest of ingredients that also happen to support the local economy.

When I make my famous homemade meat sauce, there is a distinct taste difference from when I use store bought tomatoes versus the ones that I pick fresh from my own garden.  Even if it is more psychological fiction than actual fact it doesn’t matter as freshly picked from the backyard that morning implies a higher level of quality and value.  The fact that I do not have to pay an inflated price to cover the cost of tomatoes that were likely grown on the other side of the country is icing on the cake so to speak.  Okay this is a baking versus cooking analogy, but you get the drift.

And to me in what many may contend is an overly simplistic view of Price-to-Earnings Ratio, the simple truth is that the success of a company begins with the most basic of ingredients which in the case of our restauranteurs is paying less for a higher quality product that provides a marketing edge in terms of grabbing the attention and patronage of the end consumer.

It is at this base yet critical stage upon which a business’ success is built as it drives the numbers that cascade throughout the entire organization.  Or to put it in even simpler terms, if you can’t get customers to buy your product at a profit for you then no amount of number crunching along the lines of what I witnessed first hand during the dot com boom and subsequent implosion will matter a hill of beans.  Oh those magical days of capitalizing over a twenty year period or smoke and mirror evaluations based on the promise of future sales.

If you think about it, the P/E Ratios and ROIC formulas were the same then as they are now and as they have always been, which is why in the world of sports there is a famous axiom that proclaims that statistics are for losers.

Basically and as stated in the NU research, at the end of the day getting the right product in the right quantity to the right place at the right time is the linchpin that gives relevance to not only the five financial terms highlighted by Rudski but an organization’s entire balance sheet.


Posted in: Commentary, Finances