10 Ways Procurement Can Cut Costs This Year
Back-to-basic cost reduction strategies that generate 10 ways procurement can cut costs, generate savings, and demonstrate the function’s value.
By Hugo Britt | February 9, 2023
CFO: Welcome back! I hope you had a restful break over the holiday season – you’re going to need it.
CFO: Because this year I’m challenging you with a higher-than-ever cost savings target!
10 Ways procurement can cut costs
These back-to-basic cost reduction strategies allow procurement teams to generate impressive savings, and demonstrate the value procurement can bring to the table.
1. Leverage economies of scale
Leverage economies of scale to gain volume discounts and more favorable terms. Consolidating suppliers in key categories like technology, shipping and logistics, office supplies, and facilities maintenance is a smart way to slash costs, but unless you’re a Fortune 500 company with massive spend, this approach will only get you so far.
Join a GPO to increase your collective buying power, which is the ability of a group of consumers to leverage the GPO size in exchange for discounts. As a result, the GPO unlocks access to pre-negotiated savings you otherwise wouldn’t be able to get on your own.
2. Use reverse auctions to drive down prices
In a reverse auction, suppliers compete to offer the lowest price for a product or service. Alongside lower prices, reverse auctions can save time by negotiate with pre-qualified suppliers in a group setting and removing the need for one-on-one negotiations.
Reverse auctions aren’t the only way to skip lengthy negotiations with suppliers. At Una, we’ve already done the hard work, meaning our members can be quickly and seamlessly connected with pre-negotiated contracts from top suppliers.
3. Negotiate longer payment terms with suppliers
This strategy can help to free up cash in the short-term and increase working capital, which means decision-makers can create a healthy buffer and use it to quickly allocate cash toward priority projects (including cost savings initiatives). However, there are two sides to every coin: longer payment terms can cause cash flow difficulties for your suppliers.
4. Implement an e-procurement system
Implement an e-procurement system to automate the purchase process and reduce the time and cost of manual purchasing.Time equals money, which means the hours spent manually entering data into a spreadsheet is costing you more than you would spend on implementing an e-procurement solution.
Furthermore, not having an e-procurement system hampers your ability to analyze spend and identify additional savings (see point 5).
5. Implement spend analysis to identify savings opportunities
This can help procurement professionals identify opportunities to negotiate better terms, switch to a lower-cost supplier, spot maverick or duplicate spend, and identify risk.
Una can help with spend analysis to increase your speed to savings. If your spend data is stored in a centralized system, our team can promptly and efficiently comb through your spend categories and identify which ones would benefit most from our collection of pre-negotiated contracts. The process of reviewing your current spend data and conducting a cost analysis is seamless which means our members are usually able to start saving within a couple of weeks.
Not every savings strategy will be applicable or relevant to your business. Remember, there’s no need to over-complicate things when trying to save money for your organization.
6. Implement a supplier performance management program.
This can help to reduce costs by ensuring that suppliers are meeting their commitments and delivering high-quality products and services. Monitoring supplier performance can also help you identify better ways of working together and efficiency improvements to generate cost savings.
7. Consider purchasing from local suppliers
Consider purchasing from local suppliers or participating in local procurement initiatives to reduce transportation costs and support the local economy. Local sourcing bypasses geopolitical conflict, global shipping disruptions, and trade roadblocks, and is generally seen as more flexible and sustainable.
8. Implement a contract management system
A contract management system can help manage and track contracts with suppliers. This can help to ensure that the terms of the contract are being followed and that the company is getting the best value for its money.
The key is visibility. A lack of visibility into spend and contract data also contribute to the difficulty of managing spend. Contracts that are set to auto-renew are often forgotten and price increases aren’t addressed because there isn’t an easy way to compare other options in the marketplace.
9. Implement a strategic sourcing process
A strategic sourcing process can help identify the best value for the company.
This can involve:
- Shifting the culture from short-term thinking/reactive procurement to long-term planning/proactive procurement.
- Evaluating the total cost of ownership for a product or service, rather than just the upfront price.
- Identifying and prioritizing relationships with strategically important suppliers.
10. Use data analytics to identify trends and patterns
These things can help procurement professionals make better decisions. Cognitive procurement, for example, uses AI tools including data mining, machine learning and pattern recognition to help procurement professionals make better-informed decisions about which suppliers to use and when to make purchases.
For more cost reduction ideas, check out The Ultimate Guide to Cost Savings: