Is It Time To Cut Costs? 8 Effective Ways To Reduce Costs In Procurement

Accurate, efficient and transparent procurement strategies can be put in place to maximize savings. These include refinancing, negotiating contracts and bundling. In addition to supplier management – proper measurements and visibility – collaborative supply chain cycle time and cost reduction, consolidating vendors and deliveries will result in large savings at the bottom line.

Understanding the underlying cost drivers of key business functions is critical before adapting and revising procurement measures. The total cost of procurement processes can include the unit costs of the goods and services, service fees, wait time for deliveries, and overall quality reliability. 

Below are 8 effective strategies to reduce costs in procurement.  

1) Negotiate Vendor Contract Terms

  • Negotiate better terms with current suppliers, focusing on lower prices.
  • Consider contract extensions to achieve lower prices.
  • Seek strategic partnerships with other vendors to meet price and quality objectives
  • Use value-based pricing to compete on services, not just price.
  • Consolidate Vendors and Deliveries
  • Defer major purchases or negotiate interest-free payment terms over a longer period to conserve cash flow

 

2) Bundle 

Look for strategic partnerships and opportunities to bundle products and services. 

Bundle contracts: Secure standardized terms with the same supplier throughout the organization and aggregate volume discounts, in exchange for one point of contact and standard requirements.

Bundle volume: Consolidate spend and volume from one or fewer suppliers than the status quo, for example, within a spend category to better negotiate volume discounts and obtain more standard terms from suppliers than would be possible without bargaining across categories.

 

3) Improve Vendor Relationship Management 

Evaluate your vendor relationship management. Ensure that all vendors understand the logistics of your company, are treated with respect and that communication is clear. This will allow you to receive the best quality at a fair price while decreasing delivery times.

With vendor relationship management and order management, procurement can make smarter decisions, improve vendor service levels and reduce costs.

Evaluate order quality and vendor reliability and specify requirements in cooperation with users. Ensure the end-user is always considered when making procurement changes since this can affect their overall experience with your product or service. Will a new vendor impact delivery time or quality? Will it impact overall customer service functions? 

Invite suppliers to submit a bid to supply products or services on a deal-by-deal basis, as opposed to bidding for total spending across all categories or product lines.

 

4) Rethink Your Supply Chain 

Remove unnecessary intermediaries in the value chain that do not create added value. Centralize procurement where possible to enable a unified global sourcing strategy.

Assess e-commerce solutions and procure-to-pay (P2P) automation to streamline processes.  By streamlining internal P2P processes, whether automated or not, you can reduce transactional costs and additional documentation.

Communicate with key suppliers to determine if they offer preferred pricing, payment terms, and other opportunities for cost savings

Streamline inventory management. Use analytics to determine order lead times, in-transit inventories, time-in-stock, and order cancellations. Use a retailer’s database of approved suppliers to rationalize inventory by eliminating products that are not regularly ordered, are obsolete, or have become out-of-stock.

While wholesalers can offer a wide range of products and provide essential order fulfillment, they often also tack on extras like expedited shipping and handling charges that contribute to their profits but add nothing to the value received by the retailer.

Create a rationalized supplier database to increase competition among suppliers and reduce supply costs. With access to rich supplier data, a retailer can benefit from tremendous purchasing power and can select the best suppliers to meet its needs.

 

5) Revisit Vendor Contract Terms 

Any contract not reviewed for more than three years should offer some savings opportunities. It is likely that some pricing has become uncompetitive and that there is scope for revisiting payment terms, including the cost of financing, quantity discounts, payment terms, and incentives.

Open discussions with your suppliers about potential changes to purchasing frequency to incentivize volume discounts. Look at changing materials, raw materials, or components that are cheaper to make, more efficient to make, or can be made locally. 

Consider larger order volumes, different delivery terms, and contract lengths to increase price competitiveness and achieve greater economies of scale.  

If you work with vendors regularly, you might want to set up a bidding system for projects and work. If you ask different vendors to provide quotes, you can have them compete to see who has the best service at the lowest price, or who has other perks. 

 

6) Use your Data to Reduce Consumption 

Evaluate whether all business purchases are necessary. Does the purchase add value to the organization? 

Establish and follow up on policies and guidelines to minimize over-consumption. You should review your data every month to establish patterns of over-consumption and use these findings to reduce consumption and costs.

Clean, complete, and timely data is critical for embarking on any savings initiative. Reliable information on past purchases and supplier performance can highlight opportunities and drive re-negotiation efforts.

 

7) Insource or Outsource 

Analyze the cost of insourcing compared to external spending.

  • What do you have the internal capability for, or how can you train and reskill internal resources to complete tasks that have traditionally been outsourced? 

Analyze the cost of outsourcing compared to doing it internally.

  • Lower costs due to the outsource partner’s economies of scale by aggregating customers’ requirements
  • Outsourcing low-value or high-volume purchases frees up expensive internal resources.
  • Access to global expertise and market knowledge in categories where there is little in-house capacity or experience
  • Time-consuming negotiations and contracting can be managed by specialists.

 

8) Strategic Partnerships 

Integrate the value chain with important suppliers to improve efficiency. Working with strategic partners and suppliers can help you develop more innovative products and technologies while keeping costs low. Enter into collaborative projects with key suppliers to identify win-win situations and bundle volume with other players.

 

 

At The Poirier Group, we work alongside organizations to build a competitive advantage through the development of sustainable, world-class procurement capabilities. We work with your team to understand your internal business structures and overall strategic goals to identify improvement opportunities that are aligned with your business and that address the root causes of your procurement and sourcing challenges. We help your company streamline processes, minimize risk, reduce raw material prices and costs, and identify better sources of supply to reduce your bottom line and achieve future state goals.

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