How to Radically Reduce Procurement Costs

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Thursday, January 16, 2020

Cutting procurement costs can be hugely beneficial for a company's overall financial position, but what’s the best way to go about achieving this goal?

Article 4 Minutes
How to Radically Reduce Procurement Costs

Procurement represents a substantial portion of overall spend for most businesses, so any reduction in this department's outgoings can be a huge advantage.

Achieving a healthier profit margin is the clearest benefit to be gained from lower costs, but cutting the amount you spend on business-critical processes can also prove particularly important to help you stay efficient, sustainable and competitive.

With that in mind, here are some of the most effective steps you can take to radically reduce your procurement costs:

1. Competitive sourcing

Sourcing - and how much the business spends on acquiring what it needs - makes up a large part of what the procurement department does daily. Consequently, it accounts for a substantial proportion of typical spend.

You want to do everything you can to get the best possible price from your suppliers, and one of the ways to do that is through competitive sourcing. Use every tool at your disposal to compare quotes from a range of potential sources and make sure your suppliers know they have to be competitive to win your business.

An additional benefit of this approach is that it helps you avoid over-reliance on a single supplier, which makes you more agile and adaptable to change.

2. Supplier relationship management

Maintaining good relationships is a fundamental part of running a healthy business. If you have positive connections with a broad range of suppliers, you can feel more confident of securing the best prices and receiving a product or service that meets your needs.

Good supplier relationship management also reduces the risk of late deliveries, disagreements and disputes, all of which can generate unwanted and unnecessary cost for the business.

There are various steps you can take to achieve better relationships with suppliers, such as:

  • Introducing dedicated channels for two-way communication
  • Embracing technology to enhance transparency
  • Viewing your suppliers as partners, not just vendors

3. Evaluation of business needs

A supplier that was well-suited to your needs one or two years ago might not be the best fit today. It's important to conduct regular analysis of your organization and what it requires from its partners, to ensure your relationships are always relevant and worthwhile.

This is particularly important if you’ve experienced significant change recently, be it downsizing, expanding, entering new markets or revamping your product offering.

If you find that your current supplier relationships are no longer fit for purpose, don't hesitate in looking for new sources and procurement opportunities that reflect the nature of the business today. Ensuring your suppliers are able to meet your changing needs reduces the risk of money being wasted on resources that don't deliver real value.

4. Process efficiency

A range of processes need to come together and function efficiently to enable the overall success of the procurement department. Just one weak link in the chain can lead to any number of problems, from a slower purchasing cycle to late payment, which can damage supplier relationships.

There are numerous examples of procurement processes that, in many businesses, aren’t as efficient as they could be, such as supplier onboarding and lifecycle management.

You can also make big efficiency gains and cost reductions through strategies like vendor consolidation, which can unlock volume discounts and give you fewer supplier relationships to manage.

5. Leveraging new technologies

There aren't many areas of business in the 21st century that don't have something to gain from rapidly advancing technologies.

In the procurement space, one particular area of innovation that holds great potential is automation, something that’s expected to have a growing impact in the years to come. Being able to automate fundamental procurement processes such as purchase order administration and invoice management can save you a lot of time and money.

Another increasingly important technology is data analytics, which can help you derive maximum value from your supply chain data and minimize inefficiencies resulting from oversights or lack of awareness.

6. Data cleansing

Like many business departments today, procurement is heavily reliant on data to run with maximum efficiency and effectiveness. Out-of-date, inaccurate or unreliable data can lead to serious inefficiencies that hurt your efforts to reduce costs.

If, for example, you have old contact data for a supplier or the wrong shipping address for a key client, you’ll have to set aside the time and money required to correct the mistake. Errors that go unnoticed can lead to major logistical headaches and damaged relationships.

It's highly advisable, therefore, to invest in regular data cleansing so you know all the information at your disposal is relevant and correct.

7. Staff training

Technologies like process automation are having a big impact on procurement, but that doesn't mean the human resources in your team are no longer relevant.

In fact, having well-trained, capable professionals in the procurement department is essential to maximize your cost efficiency and help the business boost its profitability.

Investing in training and skills development can help you maintain positive supplier relationships, get the best results from negotiations and make the right decisions at key moments, all of which could prove vital to your long-term success.

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