In this current increasingly competitive business environment, almost every organization is striving to cut operating costs so as to increase profit margins. Here are five effective ways to cut procurement costs, while achieving greater efficiency at the same time.
- Review terms with your existing supplier.
Regularly review contracts with your suppliers to see how you can cut down on costs, or how both parties can work together more effectively. For example, you might want to consider purchasing slightly more products than usual to receive better deals or discounts. Also, if you find yourself having excess inventory (which would increase costs), you might want to review purchasing requirements. This ensures that you only purchase items you require, which will help you reduce inventory costs.
Don’t forget to negotiate – discussions with your supplier may lead to reduction in costs, especially if they want to continue working with you. It would be advantageous to be aware of present prices and terms with other suppliers to form the basis for discussions. This can help to save costs, as suppliers will be motivated to present better terms when facing competition.
- Don’t waste your time on little savings.
Avoid being myopic – it might not be a good idea to spend too much time cutting costs. For example, if your time is worth $100 an hour, spending one hour calling many different vendors to compare prices is very poor usage of time. Also, it’s not worth bargaining for something that has a low cost in the first place; significant savings are almost rarely achieved by focusing on reducing small costs.
Instead, focus on processes that can help to reduce the soft costs of your business. Spend your time developing strategic changes and improvements that will result in greater savings, such as automating procurement processes by employing technology. You might want to utilize procurement experts like ThunderQuote to help you minimize the time and hassle required to find different vendors and to compare prices.
- Explore alternative suppliers.
Sometimes, it might be better to switch suppliers, especially if your current supplier isn’t meeting expectations, or if their prices are higher than the industry average. Consider suppliers that can give better terms such as ease of ordering, product quality or faster delivery, even if it means a slightly higher product price. You might end up saving more from the increased efficiency which drives down overall costs. Make the switch if you are able to get what you require from the new supplier but at a cheaper price.
- Economies of scale go a long way.
You can cut procurement costs by eliminating multiple suppliers for an item, or if you’re able to find one main supplier to provide what you need. This helps businesses gain economies of scale, which naturally reduce costs. For example, if you cut to only three main suppliers from ten, you can save on administrative costs, delivery costs, processing costs, as well as time spent on purchasing, negotiating and accounting.
However, take note that you might be exposing yourself to greater risk. If your supplier fails to perform or backs out, the costs you incur might be great. Fortunately, you can employ measures to reduce risk, such as conducting supplier background checks.
- Computerize the purchasing process.
This might be costly in the beginning, but would ultimately result in greater cost savings in the long run. Employing technology to computerize processes such as online supplier catalogues and order systems may lead to procurement savings. Tendering and procurement auctions can also help to reduce costs and improve price competitiveness. Computerizing such processes all contribute to efficiency and reduced costs.
Additionally, procurement softwares and applications are great opportunities to help your business reduce costs. For example, applications that provide analysis reports can help you identify which suppliers and products your business spends the most on. Reducing costs in these areas would help achieve significant cost savings. There are several procurement tools online which are great investments that your business can consider.
There are substantial number of ways to save costs in procurement processes, and it would be good for both staff and managers to be aware of them. Hopefully, these tips can help you reduce procurement costs and increase bottom line profits. If you need help finding a supplier, you can easily get and compare 5 free quotations from reliable vendors on ThunderQuote.
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