15 Cost Reduction Strategies in Procurement
The ultimate savings guide outlining 15 of the most efficient ways procurement professionals can reduce costs, add value, and make an impact.
Save money and add value
There are dozens of ways sourcing professionals can drive cost reduction in procurement. Some can be seen as “low-hanging fruit” that are relatively easy to attain, while other cost reduction strategies will require significant investment of time and money and could take years to generate a return on investment.
With a bit of focus and determination, procurement can make a massive impact in terms of slashing costs and uncovering new value for the organization.
This guide will walk you through Una’s top 15 cost reduction strategies in procurement and how you can implement them within your own organization, and offer up supporting content to help you move the needle.
15 Ways to Save Money, Add Value & Make an Impact
Build a Cost-Conscious Culture
There’s little point in investing in cost reduction strategies if your organization does not have a cost-conscious culture. Organizations without this culture typically have out-of-control spend where employees do not consider the impact to the business when making purchasing decisions, from buying office supplies to corporate travel.
In a cost-conscious culture, employees treat every dollar of company money as if it were their own. This means they will seek the best value for their money, look for better deals, and consider whether or not a purchase is really necessary. Build a cost-conscious culture by winning management support for cultural change and through ongoing training, starting with new employee onboarding.
Get tips on how to get the whole organization behind the kind of culture you’re trying to cultivate:
Implement Category Management
Just like a household budget, spend can be difficult to understand and manage if it’s all lumped together in a single sum. Categorizing spend avoids a one-size-fits-all approach to procurement, enabling category management, category-specific spend analytics, supplier consolidation, and other techniques that drive cost reduction.
Check out Una’s other resources dedicated to helping you implement a category management strategy:
Manage Tail Spend
Tail spend consists of high-volume, low-value, decentralized purchasing. Typically containing 80% of suppliers but only 20% of spend, it’s tempting to ignore tail spend, but it adds up. With the help of procurement software, the visibility of tail spend can be improved, analytics applied, risks mitigated, and significant savings uncovered.
Manage Indirect Spend
Overlapping with tail spend, indirect spend refers to the many costs of running a business that are not directly related to creating the organization’s key product or service. Indirect categories range from office supplies to travel, to packaging and office maintenance. Bringing indirect spend under the central procurement team’s control allows for better spend management, lower risk, and increased savings.
Additional resources dedicated to helping you manage indirect spend:
Address Maverick Spend
Spend mavericks can undo all the great work procurement has done to plan, negotiate and implement savings programs. Mavericks ignore procurement guidelines and policies for many reasons including disliking or not understanding the procurement process, ignorance, being time-poor, having a preferred supplier, or mistakenly believing they can get the business a better deal.
Instead of seeing mavericks as the enemy, think of them as an opportunity for vital feedback. Maverick spenders can alert you to clunky procurement processes, poor stakeholder communication, and other issues.
Spend analytics in indirect and tail spend often reveals duplication issues where different people in the business are sourcing the same product or service from multiple suppliers.
Consolidating suppliers will increase spend volumes and the chances of successfully negotiating a high-volume discount with a single supplier.
Ready to take your supplier relationships to the next level? These resources should help:
Drive Efficiency in the Procurement Process
Cutting your time-to-source will not only help your business save money and increase profits by getting the end-product to the customer faster, but saves money in terms of procurement team salaries.
Review the end-to-end sourcing process to look for bottlenecks and lengthy or manual tasks, then improve processes and automate wherever possible.
Una’s playbook for jumpstarting procurement is designed to give you step-by-step instructions for building a comprehensive sourcing strategy that facilitates efficiency and profitability.
To learn more about your sourcing options and how to create the right strategy for your team, download the full playbook below.
Risk reduction in procurement and supply chain management is like insurance. You’ll need to spend some money and effort on risk mitigation, but the payoff with be worth it when disruption occurs. For example, organizations that took a Just-in-Case approach to sourcing were in a more resilient position when the Covid-19 crisis first emerged.
Protect Against Price Hikes
A carefully constructed category strategy and budget can be disrupted in a moment by unexpected price hikes. These occur when supplies pass on costs incurred in their own supply chains, for example caused by a sudden shortage of raw materials. Protect yourself against price hikes with strategies including hedging, purchasing a futures contract, shifting to a Just-in-Case model, or partnering with a group purchasing organization.
Focus on Sustainability
While some suppliers use sustainability as an excuse to push prices up, shifting to a circular economy has the potential to drive significant cost savings. Before any purchase is made, buyers should consider the three R’s: Reduce, Re-use, or Recycle. Sourcing sustainable materials will also help mitigate risk as finite materials will inevitably become more expensive over time.
There are dozens of ways procurement can embrace sustainability, including nurturing supplier innovation in areas such as packaging and ingredients, looking at the Total Cost of Ownership (TCO), and shifting to local sourcing.
Encourage Supplier Innovation
Procurement and supply management professionals know that the best ideas come from a company’s supply chain, rather than the internal R&D team. Supplier innovation is another great cost reduction strategy. It can take many forms, from finding better ways of working together to developing an innovative new gadget. At scale, even the smallest cost-saving innovation can make a huge difference to overall spend. Keep in mind that suppliers are unlikely to come forward with innovative proposals if your relationship is purely transactional.
Interested in the suppliers we work with? Request a snapshot of Una’s supplier portfolio here:
Engage with Local Suppliers
It’s a sad reality that it can be cheaper to ship a product from the other side of the planet than to buy it from a manufacturer in your home town. The good news is that local sourcing is steadily becoming more cost effective.
Local sourcing is cheaper in terms of logistics costs, suppliers can adapt faster to shifting demands, relationships are easier to build, and (most importantly), local suppliers are less vulnerable to major disruptions such as the shipping crisis caused by COVID-19.
Explore Lean Procurement
Create a Supplier Relationship Management (SRM) Program
Supplier Relationship Management isn’t about gaining access to immediate discounts, but will inevitably create value over time with your strategically important suppliers. A preferred customer/supplier relationship helps mitigate risk, makes it easier to work together, strengthens supply chains, and helps nurture supplier innovation.
Partner with a Group Purchasing Organization
Last, but certainly not least in our guide to 15 cost reduction strategies in procurement, is the option of partnering with a group purchasing organization to capitalize on savings.
While consolidation of internal spend will mean higher volumes with a single supplier, the savings pale in comparison to the purchasing power unlocked by working with a GPO. Group purchasing provides access to massive cost savings through volume purchasing and deep supplier discounts across several common indirect categories.
Una has spent years developing relationships with our supplier base to negotiate contracts that save our members an average of 22% on the products and services needed to run their businesses. Better yet, our services are offered at no cost – membership is free to join and our contracts are free to use.
Use Una’s free cost savings calculator tool and see just how much you could be saving by partnering with us. The tool gives you an instant estimate based on real contract terms and savings realized by actual Una members.
Like what you see? Join Una and we can quickly get you connected so you can start saving immediately.