July 03, 2023 | Procurement Strategy
If there is one agenda that has always been a part of the procurement function, it is cost savings. Businesses of all sizes and industries have evaluated procurement’s performance based on how well it has negotiated with suppliers and realized savings for the business.
Although the scope of procurement has widened significantly in the current business landscape, the primary agenda of the function remains cost savings. And this will continue to be the top priority despite the added responsibilities.
As prices of common products have increased, chief procurement officers are keen on delivering cost savings to the business, states the 2023 ProcureCon CPO report.
Interestingly, many businesses now look at cost savings from a different perspective. Unlike earlier when savings were purely measured as hard savings, businesses are today engaging in a strategic cost management program.
Such a program aims to improve competitiveness by recalibrating the cost base. It also aims to help companies align cost management with fast-changing market conditions.
Let’s look at a few strategies procurement can deploy to succeed in its cost savings initiative.
Procurement must revisit existing contracts with suppliers. Changes in economic conditions, consumer demand and technology make this a necessary exercise. Pricing is likely to have become uncompetitive over time, especially if contracts have not been reviewed for over three years. Reviewing pricing, payment terms and other clauses can create an opportunity to initiate fresh negotiations with suppliers.
While reviewing existing contracts, procurement can also review suppliers that have become less competitive over time. Ask these suppliers to reduce costs in line with market conditions. If they do not agree, it’s best to take them off the supplier list and replace them with suppliers that are more competitive. Consolidating the supplier base can also help as you buy more goods from fewer vendors. This allows your business to take advantage of high volume pricing.
Procurement should work closely with suppliers to identify cost-saving opportunities without compromising product quality and performance. In this endeavor, they can explore alternative materials, components, designs or even manufacturing processes.
Procurement can leverage technology to automate repetitive, time-consuming tasks and reduce the need for human intervention. Additionally, technology can provide the much-needed visibility into procurement spend and identify new opportunities for cost savings.
Purchases that do not follow defined processes and are made outside agreed contracts account for a large percentage of total purchases. To check this spend, procurement should ensure that no purchases are made outside the contract. Spend analysis can highlight areas where uncontrolled spending occurs. Procurement must take steps and implement control measures such as purchase requisitions to curb this spending.
Given the uncertain economic environment, it is important for procurement organizations to stay prepared for supply chain disruptions and establish a contingency plan. In this plan, they must identify secondary suppliers for all items that are critical.
Building cross-functional collaboration is vital to bringing down costs. Sourcing, procurement and finance teams must work in close collaboration to judiciously utilize budgets and identify opportunities to optimize costs. If the budget needs to be increased, there must be a clear business case and value proposition.
Effective inventory management can help procurement lower costs. Instead of strictly following a just-in-time or just-in-case strategy, procurement can leverage demand planning and forecasting tools to maintain optimum inventory levels. Enhance forecasting accuracy to avoid surplus inventory or stockouts.
A longer-term strategy to cut down costs is to explore the possibility of procurement outsourcing. Outsourcing can be ideal for non-core procurement activities or indirect categories such as facilities management. Outsourcing procurement can help achieve economies of scale and allow third-party providers to negotiate better deals and secure better pricing. Additionally, it can free up internal resources and let them focus on core business activities.
Businesses should also invest in training programs to improve the procurement team’s skills and knowledge. If the business has invested in procurement technology, train the staff on how to utilize the tools and analyze data to make informed purchasing decisions.
By following the strategies mentioned above, procurement can explore new ways to lower costs amid a rapidly changing business landscape. Procurement must also look at the bigger picture and look beyond hard savings. Looking at things holistically and engaging in strategic cost management are key to successfully implementing cost saving strategies.
Read this GEP white paper to learn more about strategic cost management.