Techniques for Reducing Procurement Costs

In procurement, cost reduction is usually referred to as cost savings from the purchase of goods and services. However, there are more opportunities for cost reduction in procurement besides saving on purchasing. 

This article will cover various efficient strategies and techniques for reducing procurement costs without sacrificing quality. Implementing these techniques will help you to optimize procurement spending and get higher returns on investments. 

Well, if you are ready, let’s dive into it. 

What is Procurement Cost? 

Procurement costs are fees and expenses associated with the procurement process, such as the purchase of goods and services to run the business. 

Procurement costs can be direct and indirect. Direct costs are those necessary for the production of the end product, such as wood, to produce wooden furniture. Meanwhile, indirect costs are costs necessary to run the business but not directly related to the production of the end product. An example of indirect procurement cost is office supplies. 

Importance of Cost Savings in Procurement 

Cost savings are crucial for various reasons. For instance, with an effective cost-reduction strategy, businesses can enhance financial stability. Cost savings contribute to healthier cash flow, making the company immune to unexpected expenses. 

Also, businesses will be able to improve their profit margins. Procurement costs directly impact the bottom line, so by reducing these, the organization improves profit margins without a need to make more sales. 

Incorporating cost-reduction strategies also promotes sustainability within your organization. For example, optimizing inventory management to reduce costs also minimizes waste production. 

Finally, cost reduction strategies help to facilitate strategic planning within the organization. Higher cost savings allow the company to allocate resources for other strategic initiatives to meet its long-term goals.

Best Cost Reduction Strategies in Procurement 

There are multiple cost-saving strategies that businesses implement on a daily basis. However, sometimes it can get a bit tricky, especially when it comes to procurement. 

To reduce procurement costs you can negotiate for better contract terms, ask for discounts, analyze spending and eliminate unnecessary expenses, and so on. So, let’s review the tested and proven techniques for reducing procurement costs in more detail. 

Revisit Current Contract Terms 

One of the most simple things you can do to reduce procurement costs is to revisit contract terms and conditions. When you have been collaborating with the suppliers for a long period of time (over three years), the prices can fluctuate due to changing market trends and demands. 

Thus, do not hesitate to revisit payment terms and openly communicate with your suppliers your current needs. 

Request Discounts 

On the note of revisiting contract terms to negotiate better deals, you also should be open to asking for discounts. For instance, if you are planning to renew a contract with one of the current suppliers for the long term due to a large volume of purchases, suppliers also are motivated and open to providing their clients with discounts. 

If the supplier is a new partner, also ask for discounts especially if you are purchasing a large volume of goods. At the end of the day, it all comes down to communication and negotiations. 

Eliminate Maverick Spending 

Maverick spending, essentially is purchasing outside of agreed contracts. These types of expenses usually break the rules of established procurement procedures. 

Maverick spending usually is made by mistake, however, it costs the organization cash. The mistake has a high chance of recurring if the organization does not have a centralized procurement system.  

Thus, another strategy to reduce procurement costs is to eliminate maverick spending. You can do so by incorporating a centralized procurement system that gives full spend visibility. 

Analyze Operational Costs and Adapt for Better Efficiency 

In order to reduce procurement costs you should always be aware of current operational costs. If you fail to plan resource location and procurement activities it will lead to unexpected expenses that could have been easily avoided. 

So, conduct an operational cost analysis to find areas that need improvements. You can start by conducting a cost analysis to evaluate costs associated with different aspects of the procurement process (logistics, sourcing, purchasing, administration, etc.). 

After cost evaluation start comparing your operational costs with standardized industry benchmarks. Then, identify cost-saving opportunities, set goals, and create a plan of action on how to achieve those. 

Identify Uncompetitive Suppliers 

Regularly conduct supplier audits to identify top-performing ones as well as ones that are not performing at best. You should consider terminating contracts with suppliers with uncompetitive pricing, low-quality products, or a history of late deliveries. 

Terminating contracts with uncompetitive suppliers will help to save time and resources in the long run. For instance, consolidating the total number of suppliers you collaborate with, will help you achieve a more manageable number. Thus, you can focus on bulk purchasing from quality suppliers ensuring both price discounts and high quality. 

Improve Vendor Relationship Management 

Another long-term initiative to reduce procurement costs is to focus on improving overall vendor relationship management. 

First, you need to continuously track and monitor metrics to identify vendor performance. Continuous monitoring will allow you to evaluate suppliers based on their performance and communicate your organization’s needs better. 

When it comes to vendor management it is also vital to use tools that facilitate real-time effective communication. Clear communication will help you build trustworthy relationships and negotiate better contracts. 

Overall, when it comes to improving vendor relationships focus on clear communication, fostering mutual trust, and engaging in joint problem-solving. 

Improving vendor relationships will allow you to negotiate better deals, get more discounts, and offer cost cost-saving opportunities.

Improve Inventory Management 

To reduce procurement costs focus on improving inventory management. Effective inventory management will help you use resources more efficiently. 

Good inventory management allows saving costs in multiple ways, including the following: 

• Maintenance of optimal inventory levels and minimizing excess inventory. Excess inventory can result in additional storage fees and costs. Thus, by keeping optimal inventory levels your organization avoids fees associated with extra storage and specific conditions for inventory maintenance. 
• Reduces stockouts. By reducing stockouts your organization improves its chances of maintaining a good reputation among customers and making more sales. 
• Reduces the need for placing emergency orders. Emergency orders that are placed due to unanticipated stockout are usually the costliest orders. By optimizing inventory management the organization can avoid emergency orders and reduce procurement costs. 
• Reduces waste. Good inventory management practices also reduce waste produced from obsolete stock. 

By optimizing inventory management within your organization you can greatly reduce the costs of your procurement process. 

Improve Risk Management 

Another way of reducing procurement costs is to focus efforts on improving risk mitigation. Risk management helps to ensure that emergency purchases, fraud, and other costly risks associated with procurement are mitigated. 

However, these risks are always present especially when the procurement system is decentralized. Thus, focus on improving procurement processes and centralizing activities to mitigate risks such as duplicate payments, fraud, etc. 

Better risk management will save your organization lots of resources. 

Incorporate Centralized Technology 

Another way of reducing procurement costs is to incorporate centralized technology. Tradogram is an all-in-one procurement solution. The platform allows you to store all the documents and data regarding different aspects of procurement in one place. Thus, it improved the transparency and accessibility of data by authorized users. 

In fact, Procurement Software Market is expected to reach USD 9.5 Billion by 2028. These statistics illustrate the growing demand for centralized procurement systems among businesses that aim for cost savings and process optimization. 

Automate Procurement Processes 

To reduce procurement costs, you should consider automating repetitive tasks. This will help to free up time for employees to focus on more strategic business initiatives. 

For instance, you can set automated approval workflows to improve PO and invoice processing. Another way to automate day-to-day procurement activities is to implement tools that automatically fill out PO details to eliminate the need for employees to add details manually. 

Develop a Good Procurement Strategy 

To reduce procurement costs, you need to develop a comprehensive procurement strategy. The strategy will help you identify goals and create actionable steps to achieve these. 

To develop a procurement strategy: 

• Set cost-saving and reduction objectives, aligning those with business goals. 
• Streamline the procurement process by incorporating relevant technology for process optimization. 
• Develop a comprehensive category management approach (segment spending based on categories to gain deeper insights into the business spending). 

Continuously track and monitor the performance of different aspects and benchmarks against established objectives to understand where you are and what needs to be done to achieve the set goals. 

Reduce Procurement Costs with Tradogram 

If you want to incorporate the above-mentioned strategies efficiently and are looking for the best platform to do so, then you are in the right place. Tradogram is an all-in-one, cloud-based procurement solution. 

It comes in handy with a variety of useful features ranging from spend analysis and budgets to vendor and inventory management tools. With Tradogram’s solutions, you will be able to gain 100% visibility into your organization’s spending patterns and streamline procurement for maximum cost-efficiency. 

Find out more about how Tradogram can help you reduce procurement costs here.