Introduction If you're looking for ways to reduce your company's procurement costs, you're not alone.
business environment with surging inflation , cost reduction has become a top priority for organizations of all sizes. By minimizing procurement costs, you're able to free up resources that can be used to pursue other areas of growth in your business.
What Is Cost Reduction in Procurement It's no secret that cost reduction is a crucial component of procurement. But what exactly does it mean?
Cost Savings vs. Cost-Cutting
Cost savings and cost-cutting are two different concepts. While they may be related, cost cutting is a last-ditch attempt to save money. Cost savings, on the other hand, is a voluntary process that can increase productivity and profit.
8 Quick Ways to Generate Procurement Cost Savings Purchasing is one of the most important functions of any business. It requires a proper plan for procurement savings to decrease costs, improve supplier management , and add up to the bottom line. There's a wide range of procurement saving ideas, some simple to implement, others more complicated or time-consuming. Depending on your business needs and scale, here're 8 procurement cost reduction strategies you can consider for your business.
1. Consolidate and Centralize Data To make sure you're spending your money wisely, you first need to collect accurate data. Connect all your procurement data to get a complete picture of your critical metrics. Then you can use a centralized database to see which items you should purchase more or less frequently, whether sales and inventory meet up, and whether you should change a supplier.
It provides you with real-time reporting and enables you to find cost reduction techniques in procurement.
2. Improve Payment Terms Payment terms are one of the most powerful levers to improve working capital. To influence payment terms, compare supplier payment terms across regions or within a category to understand the differences.
Once you have identified suppliers with sup-optimal terms, request longer payment terms by demonstrating how their terms are worse than other suppliers in, for example, that category. By prolonging payment terms, you can improve your working capital.
3. Bundling Spend With the Most Competitive Suppliers The savings aren’t just limited to price. By bundling the spend with fewer and most competitive suppliers, you also reduce complexity and time spent on procurement. You can also use this opportunity to negotiate better terms, such as payment terms and delivery schedules.
Let's say you have 13 suppliers all providing a similar product for a yearly spend of 1.9M USD. By bundling the spend with, e.g., 2-3 suppliers, you can often negotiate a substantial price reduction.
4. Negotiate Better Terms Are there any terms that can be improved? Suppose you want to reduce your total cost of ownership (TCO). In that case, your suppliers must work together to reduce costs without affecting service levels or the quality of products/services delivered. You could ask them to reduce their prices if they can deliver on agreed service levels or vice versa.
Also, consider negotiating for better payment terms if you want to identify which suppliers have increased their prices unreasonably, price variation across BUs from one supplier, or you want to address price differences across suppliers.
For example, if a supplier offers free shipping when buying more than 100 units, ask for free shipping for buying only 50 units. In some cases, it may not be possible to get better terms, but it’s worth asking as often they will accommodate this request if it helps them sell more products/services.
5. Reduce Maverick Spend by Increasing Contract Coverage Maverick spend is a serious issue for companies, as it can cost them millions of dollars per year. One type of Maverick spend is purchases outside a contract – which can be proxied by connecting contracts to spend. You can leverage this connection to identify purchases (suppliers or products/services) without a contract.
By addressing these "rogue" purchases, you can negotiate standardized terms in a contract or shift spend to alternative suppliers with a contract. Typically addressing maverick spend can reduce costs by 5% on average – in a 54M USD category that translates to savings of ~200K USD / year.
6. Regularly Evaluate Your Suppliers As a procurement professional, you know that one of the best ways to ensure your success is to find great suppliers who can deliver what you need when you need it. Keep tabs on your vendors: If you evaluate your suppliers regularly, you'll be able to assess whether you're getting the best deal for your business. Not just that, it also helps you understand performance and improve it going forward. For example, more timely deliveries, higher quality services or items, etc., which over time will lead to lower costs.
Over time, you’ll have a list of vendors that fit your needs and optimize spending.
7. Reduce Transaction Costs Suppliers often have to send you a separate invoice for each purchase. Companies, on average, receive multiple invoices per day per supplier. Adobe estimates that the cost of processing an invoice could range from 15-40$. That's a lot of paperwork, which means a lot of costs.
Adobe estimates that the cost of processing an invoice could range from 15-40$.
Suppose your company receives 5000 invoices per month, and you can group purchases into fewer invoices to reduce the number of invoices by 5-10% (250-500 invoices). This translates to an efficiency gain of 6K-15K USD / month or ~70-180K USD / year.
8. Reduce Supply Risk Risk management helps you reduce or avoid risks to your business, so it's an essential skill to develop. Having a complete plan in place will better prepare you to handle unexpected events and avoid unplanned costs.
One of the most common risks facing organizations is supplier dependence—that's where there are no alternatives if something goes wrong with the supplier. Reduce risks to your business by procuring goods and services from a diversity of suppliers. If one supplier cannot supply the goods or services you need, you have other options. Furthermore, make sure that you have clear contracts with your suppliers, so there are no unexpected logistical problems.
Why Is Cost Reduction Necessary in Procurement Cost reduction is the most sought-after advantage because of the direct impact it has on profit margins. When a company performs cost reduction to increase profits, they have more money to invest in other areas. This can be used to protect their profit margins and make sure that they're able to consistently offer goods and services to customers at favorable costs - ultimately increasing and safeguarding profit margins.
How Strategic and Data-Driven Procurement Reduce Costs Do you know what the average business spends on procurement? It's 65%-75% of their outflows ! That's a lot of money, and it's crucial to your company's success.
prioritization matrix comes in handy. It evaluates the ease of implementation and impact so you can make decisions based on the most important factors for your organization. You can download your free copy of the Prioritization Matrix here: Prioritization Matrix Template. Renegotiation Meeting Template .
How Do You Calculate Cost Savings in Procurement Calculating cost savings in procurement isn’t a simple task. In fact, it's not even possible to measure cost savings without considering other factors at play. Because of this, you'll need to consider your options carefully when measuring savings.
Bridging the Gap Between Procurement and Finance Procurement and finance both have a lot to contribute to the success of a company. However, these two departments can have different goals and priorities.
How You Can Reduce Procurement Costs With Ignite When it comes to your company's bottom line, every dollar counts.spend analytics software , you can take control of your spend and make sure that every penny you pay for goods and services is well-spent.Click here to get started today with Ignite !
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