How to reduce costs in procurement

Organisations of all sizes try to find solutions to reduce their costs, but when you are developing your procurement strategies, understanding how money can be saved across your organisation is essential. In procurement, costs can run high when the process is no longer suitable fit for purpose or if people within the organisation are not sticking to it.

Cost reduction in procurement refers to the savings made during a purchase process. However, in procurement, there is much more that goes into it than simply finding a good bargain at the right time. The act of reducing costs usually involves elements like the re-negotiation of contract terms and conditions, administrative and operational process improvements, cost avoidance, sweating assets, total ROI (Return on Investment) or unnecessary spending, and the intelligent use of data and technology.

There are many areas where the art of reducing costs comes into focus, especially within procurement and knowing the subsequent areas which you can influence can make all the difference. Critically, some short- and long-term solutions can influence the strategy you use such as revisiting contract terms, eliminating maverick spending, looking at alternative or more economic solutions, and investigating outsourcing costs.

We are going to take a closer look at the short-term and long-term solutions when it comes to reducing costs in procurement.

Easy and Short-Term Actions

We are going to look at the easy and short-term actions that can be taken in reducing costs in procurement.

Renegotiate Existing Agreements. Have you looked at the existing contracts your organisation has with the agreed supplier base? Do you do regular audits to see what terms and agreements you have? It could be that the pricing model has become uncompetitive and therefore you can renegotiate the existing agreement to suit both parties. Furthermore, you could develop a volume-based model where a discount is applied based on how much you purchase.

Opening up discussions with your suppliers can lead to positive changes as well as a discussion about how you are monitoring the cost savings that are required by your organisation.

Challenge specifications. How often do you ask questions like, “do we really need this?” The answer you provide to this question will help you to understand the impact of the specifications you have set for yourself as an organisation in procurement. Is the supplier giving you too much of one product as part of a wider purchase order which in turn creates waste and additional costs which can be avoided?

It could be that you only have one supplier in mind, however, your requirements are based on expected performance or outcomes allow for increased competition by a broader range of suppliers/solutions which can not only meet your actual needs but reduce costs at the same time.

Eliminate unnecessary spending. One of the terms that procurement managers will use a lot is “eliminate maverick spending” which means spending outside of either the procurement channels or outside of agreed contracts. This will mainly occur where the purchase is outside a centralised procurement system, for example, travel costs for sales staff, or technical buys specified by technical teams. These costs can run outside of the budget set by departments and department heads.

To combat this, developing greater visibility to highlight uncontrolled spending is the key. Purchase requisitions to e-catalogues can be developed to stop more incidences of maverick spending.

Challenge operational costs. When you manage and negate poor planning, you can reduce the number of wasted resources that are going into administrative operations. As such, you can develop systems that take account of operational costs from the very beginning and over time reduce the waste that is taking place within procurement areas of an organisation.

One example is where emergency procurement is made to fulfil a requirement. This is usually more costly and can incur other costs such as transportation, higher purchase prices and even additional taxes. By creating simple, streamlined processes, you can reduce transactions, the amount of time taken by staff and automate documentation in return lowering costs.

Review uncompetitive suppliers. Another quick cost reduction in procurement comes down to the approved suppliers you have selected. If you use a process of benchmarking who are the most cost-efficient suppliers, the most on-time with deliveries and even those who have the most capacity to fulfil your requirements with desirable contract offerings through volume purchases then you can begin to review your total supplier base and make the necessary adjustments to either re-establishing better trading terms or, removing them altogether.

Actively managing your suppliers is a way to understand who works better and those who don’t, based on your requirements. By minimising the number of suppliers, you create a more agile and efficient procurement process.

Use existing data. Based on the MI (Management Information) software that you use, you can gather timely information and discover many of the issues we have already identified. Analysing past purchases and supplier performance can be a great benchmark to highlight opportunities and re-negotiate contracts to facilitate cost-saving measures.

Long Term Actions

In this section, we will discuss long term actions that can be taken in reducing costs in procurement

Use technology. Technology is one of the most important and effective pieces of equipment that can be used to develop a procurement strategy that reduces costs over time. Whether it is creating an automated process that puts together purchase orders, invoices, effective message delivery or seeing the contract SLAs which have been established, technology can hold the key to reducing costs over time.

One of the lesser known areas is how software can help develop supplier relationship management (SRM). By making the communication between supplier and purchaser seamless, you remove the need for human intervention in the process of onboarding suppliers, assessing supplier performance and managing day-to-day operational issues.

Contracts Register. When systems are decentralised, it can be difficult to keep an eye on running costs and also things like maverick spending. One of the main challenges in this is when a system doesn’t identify the contacts that have been specifically selected for procurement-by-procurement teams.

But when you centralise the procurement process things like a contract register are clear to see for everyone. You can get an overview of contract expiration dates, offers on bulk purchases and even who the contact to speak to is. This helps develop relationships and give better overall value when it comes to planning negotiations and reducing costs.

Cost reduction in procurement refers to the savings made during a purchase process. Organisations of all sizes try to find solutions to reduce their costs, but when you are developing your procurement strategies, understanding how money can be saved across your organisation is essential.

There are two distinct types of cost savings which are, short term and long term. Some are easier to implement than others including things like reviewing current contracts to establishing technology to help you get better data on your suppliers and how well they are working.

How can we help?

eXceeding has years of experience in delivering solutions to the procurement areas of business of all sizes. Not only does eXceeding have a wealth of experience with organisations, it can boast ISO accreditations showing compliance and many client engagements demonstrating knowledge in the sector.

At eXceeding, we can help businesses get to grips with their procurement processes helping to create a cost-efficient system as well as streamlining processes saving time and reducing human error in this field. With over a decade of helping organisations to succeed, eXceeding is well positioned to help you and your organisation.

Contact us today to find out more.