The area of procurement can have a big impact on company bottom lines, so it’s no surprise that for procurement managers everywhere, the pressure to reduce procurement costs is growing by the day. According to Deloitte’s 2016 Global Chief Procurement Officer (CPO) Study, 74% of CPOs are citing cost reduction as a strong business priority in the next 12 months. Also, considering that procurement costs represent between 25-60% of a company’s total costs, effective procurement management is definitely a priority. This is not an impossible task and there are significant savings to be had for your company if you successfully reign in the procurement costs involved. Having a systematic approach towards procurement management can bring you savings upwards of US$2 million, which go a long way towards boosting company profits. So, with this in mind, what are some of the ways to save on procurement costs?
Keeping your suppliers in check
A big part of procurement costs stems from payments to suppliers, so this is an area where you can glean some savings. Good procurement management entails knowing where your money goes, which means knowing who your suppliers are and how they are performing. If you have suppliers who always make late deliveries and neglect to inform you beforehand, you may want to consider axing them from your list of suppliers. Late deliveries make for unhappy customers, which in turn, affect your company finances negatively. By reducing the number of suppliers on your list and only retaining the services of those that are reliable, you not only ensure that the procurement cycle runs smoothly, but load up on savings as well. It would also help to review the terms and conditions of the contract between you and your suppliers. Consider discussing with your suppliers on receiving discounts or rebates when you increase order amounts, or even when you alter purchasing patterns in their favour, e.g. ordering products for the following month two weeks in advance helps suppliers to better plan their delivery schedule, leading to higher savings. They can then transfer some of the savings to you, creating a win-win situation.
Using the right procurement software
The procurement software used by the company also adds a big chunk to procurement costs, highlighting the importance of using the right tools when it comes to managing the procurement cycle. Ideally, your procurement software should be able to analyse procurement expenditure and generate reports to help you identify the suppliers, categories and commodities on which you are spending most. That way, you’ll know which areas to focus on when trying to reduce procurement costs. Some procurement software can help you drive expenditure to preferred suppliers and contracts, giving you more value for money and savings in the long term. A good procurement software can also compile supplier data and rate supplier performance levels. To save on procurement costs, consider terminating the contracts of the suppliers who consistently receive low performance ratings. This ensures that you maintain an optimum supplier base that will give you long-term business profits.
Focusing on big-impact moves
Although it’s generally true that a little goes a long way, it may not be so when it comes to cutting down on procurement costs. As a procurement manager, you may be constantly reviewing every step of the procurement cycle, trying to figure out where you can save on procurement costs. Many procurement managers often make the mistake of focusing on garnering a bit of savings here and there over the whole procurement cycle – especially nit-picking on the cost for one item or supplier – but that’s hardly making good use of company time. Instead, you would be better off figuring out how to secure long-term savings across all areas of the procurement cycle. To bring in significant savings for the company, it’s good to look at the procurement cycle as a whole and make strategic changes and improvements where necessary. Practices such as conducting a spend analysis project, implementing procurement automation, and negotiating better terms and conditions with suppliers can drive higher savings for your company compared to if you were focusing on miniscule changes that bring little savings. Every hour of your time spent on higher-value activities is a good investment of the company’s budget that will produce bigger and better savings in the long run.
Looking at the big picture
Savings on procurement costs can come in all forms, not just from the prices you pay for goods and services. When it comes to knowing how much you’ve saved for the company, it’s important to consider the sum total of your efforts. Buyers can get plenty of savings by not just focusing on product prices, but considering other elements such as the ease of ordering, on-time deliveries, as well as open communication and good relationships with suppliers. To illustrate, some suppliers may offer you very competitive prices for their products, but do they compromise on the quality? The savings you get from procuring the services of these suppliers may not even be realised at all because you would be spending more time and money on placating angry customers who are unhappy with the quality of the products they received. Instead, it would make more sense to go with the supplier that offers good quality products at reasonable prices – it all depends on how you negotiate the deal. A contract that is fair to both parties will be beneficial to both in the long run. Also, happy customers mean more repeat business and higher customer-loyalty rates, which lead to higher profits – it all adds up!
Its not a new thing when procurement managers are feeling stressed, since it is up to them on how they are able to save and cut on costs. However so, it is definitely not an impossible thing to do and we here at ThunderQuote hope that we have been able to help you understand that!
ThunderQuote is the most comprehensive business services portal in Singapore, Australia and ASEAN , where hundreds of thousands of dollars of procurement contracts are sourced every month by major companies like Singapore Press Holdings, National Trade Union Congress and more.