Procurement is poised to improve your organization's bottom line with the right mix of cost savings strategies.
They say there's more than one way to skin a cat.
When it comes to generating cost savings in procurement, that couldn’t be more true. Just like that age-old adage suggests, there are multiple paths to achieving financial efficiency.
Whether you’re negotiating better contracts in the short-term, leveraging procurement technology for long-term visibility, or tapping into group purchasing organizations (GPOs) to unlock previously unattainable savings, the options are as varied as they are effective.
Six Types of Cost Savings in Procurement
Finding the right mix of strategies can lead to significant cost reductions—if you know where to look. So, let’s dive into some powerful cost-saving strategies, including short-term and long-term savings, cost avoidance, process efficiency, volume discounts, and total cost of ownership savings.
Plus, we’ll explore how group purchasing organizations (GPOs) can help maximize these opportunities!
Short-Term Cost Savings
Short-term cost savings are all about quick wins that can have an immediate impact on your bottom line. Even though you may be tempted to focus entirely on long-term, strategic savings, keep in mind that it may be necessary to keep your CFO happy with more frequent, short-term wins.
Example:
Regularly reviewing and renegotiating contracts with suppliers can uncover potential savings. For example, if you find that a supplier has recently dropped their prices or is offering new incentives, you can leverage that information to renegotiate your terms.
How GPOs Can Help:
GPOs often have established contracts with suppliers that already include competitive pricing. By joining a GPO, you can quickly access these agreements and potentially lower your costs without the heavy lifting of negotiation.
Long-Term Cost Savings
Long-term cost savings in procurement are all about lowering expenses over time. Instead of just grabbing quick wins or cutting corners for short-term gains, this approach focuses on smart investments and improving how things are done.
It’s about changing the culture and finding sustainable ways to negotiate better contracts, build strong supplier relationships, and streamline processes. By doing this, organizations can keep costs down consistently, making sure they save money not just now but well into the future.
Example:
Implementing procurement technology takes time, money, and effort, but it is a game changer. By adopting a robust procurement platform, you gain better visibility over your spending patterns. This insight allows you to identify trends, eliminate unnecessary expenditures, and plan more strategically.
How GPOs Can Help:
With procurement technology in place, you can generate and share vital spend data with your GPO, who can use it to spot immediate and longer-term opportunities to generate cost savings through bulk discounts.
Cost Avoidance
Cost avoidance focuses on preventing expenses before they occur. One effective strategy here is risk management. By carefully assessing potential risks associated with suppliers and contracts, you can avoid costly disruptions down the road.
Example:
Say you’re sourcing a critical component from a new supplier. Conducting thorough due diligence could reveal that they have a history of late deliveries. By choosing a more reliable supplier upfront, you avoid the costs associated with production delays and lost sales.
How GPOs Can Help:
GPOs typically have extensive knowledge of supplier performance and risk factors. By leveraging their expertise, you can make smarter procurement decisions that mitigate risks and lead to cost avoidance.
Process Efficiency Savings
Streamlining procurement processes is key to driving efficiency. By improving workflows, you can reduce the time and resources spent on procurement activities. This might involve automating repetitive tasks, which not only saves time but also minimizes errors.
Example:
If your team spends hours manually entering purchase orders, implementing an automated procurement system can drastically cut down on this time. The result? More efficient processes and lower operational costs.
How GPOs Can Help:
Partnering with a GPO enables you to reduce or entirely avoid certain steps of the usual procurement process, such as RFx and negotiation. This can lead to quicker turnaround times and more focus on strategic initiatives.
Volume Discounts
One of the most straightforward ways to save is through volume discounts. By purchasing larger quantities of goods or services, you can negotiate better pricing. This strategy not only reduces individual unit costs but can also lead to more favorable contract terms.
Example:
Let’s say your organization typically orders office supplies in small batches. By consolidating those orders into bulk purchases, you could negotiate a better discount from your supplier.
How GPOs Can Help:
GPOs excel in leveraging collective buying power. By pooling the purchasing needs of multiple organizations, they can secure volume discounts that individual companies might struggle to obtain on their own. Joining a GPO means you can tap into those savings effortlessly.
Total Cost of Ownership Savings
Total Cost of Ownership (TCO) savings involve looking beyond the initial purchase price to consider all costs associated with a product throughout its lifecycle. This includes maintenance, training, and disposal costs.
Example:
Suppose you’re considering two types of equipment: one is cheaper upfront, but has high maintenance costs, while the other has a higher initial cost but lower maintenance. By analyzing the TCO, you might find that the more expensive option is actually the better investment in the long run.
How GPOs Can Help:
GPOs can help you make informed purchasing decisions that align with your long-term goals.
Conclusion
Finding cost-saving opportunities is essential for maintaining a competitive edge. By using a combination of short-term and long-term savings, cost avoidance, process efficiency, volume discounts, and total cost of ownership savings, you can drive significant improvements in your organization’s financial performance.
Don’t forget the power of Group Purchasing Organizations! We can be invaluable partners in helping you access better pricing, resources, and insights. By leveraging our collective buying power and expertise, you can unlock a treasure trove of savings and streamline your procurement processes.
Find out what you could be saving with Una's free cost savings calculator tool:
