5 Effective Cost Reduction Strategies in Procurement
I wonder how businesses with no knowledge of reducing the cost of procurement stay afloat. The industry is full of sharks waiting to prey on the unseasoned, and procurement is a deadly spot.
If you’re trying to cut down on your company’s spending without compromising on the quality of your goods or services, then you need to start at the procurement costs because more often than not, you can get the same products for way less money.
We all know that procurement can be a goldmine for savings, but it’s not always easy to know where to start. That’s why I’ve put together this guide so you can get the same (or even better) products for less cost.
Before we talk strategy, you should keep in mind that the goal isn’t just to slash costs whichever way, but to find smart, sustainable ways to reduce spending while maintaining (or even improving) the value you’re getting and selling.
1. Embrace the Power of Supplier Relationships
You know how the saying goes; keep your friends close, and your suppliers closer… or whatever it says.
Your suppliers aren’t just vendors; they are your potential life partners in your business journey. And just like other lifetime partners (like family), you need to build strong, collaborative relationships with each of your suppliers. You’d be surprised at the kind of savings opportunities you’d discover. But how?
First thing you should do is have an honest conversation with them about your cost-reduction goals. Tell them how your business is bleeding money and you’re trying to dam the leaks. You may be surprised at how willing they are to work with you.
But you must be open to their suggestions. Show your openness by committing to longer-term contracts or adjusting your payment terms with their cash flow. The more you invest in these relationships, the more likely suppliers would be to help you save.
2. Get Savvy with Spend Analysis
I can’t believe I have to say this out loud but it will be impossible to reduce costs if you don’t track your spending. And this isn’t just about looking at your total spend over a period; it’s about checking how much goes where on your data so you can uncover patterns and opportunities for reduction.
This is where category management procurement comes in. Try categorizing your spend across different suppliers, departments. Start by categorizing your spend across different suppliers, departments, and product types. You’d be surprised what you’d find searching in areas where you’re spending more than you’d expect.
Don’t be afraid to convince through every docket though because sometimes, the greatest saving opportunities are buried deep in the details. Perhaps you pay rush fees because you didn’t make your orders on time? Or maybe you always tend to restock at times of the year when those products are usually more expensive? Analyzing data will help you find these spots.
3. Harness the Power of Technology
Manual, paper-based procurement processes are severely outdated, especially in an era where technologies run amok in society. Staying rooted in the past while trying to find ways to reduce procurement costs sounds counter-productive.
Check out e-procurement systems that can automate your purchasing processes. That way, you’d be reducing the errors you encounter in the process, speeding up order cycles, and finding better visibility in your spending.
4. Master the Art of Strategic Sourcing
You’ve got to be strategic in business if not, you’re going to encounter lots of setbacks and missed opportunities.
When I say master strategic sourcing, I mean take a holistic, long-term view of your procurement needs, which means focus on getting the lowest price for each individual purchase.
And that could come in the forms of signing long-term contracts with your supplier for significant price reduction, or finding alternative sourcing options (like reshoring or nearshoring) to reduce transportation costs.
Basically looking at the bigger picture to maximize value and minimize total cost of ownership.
5. Don’t Underestimate the Power of Negotiation
If you’re one of the many people that despise negotiations (like me), you need to bury that mindset. It doesn’t matter if you think you’ve got a great deal, there’s always room for improvement, especially if you know how to ask.
The key to successful negotiation is preparation. Before you sit at the table (or hop on that Zoom call), make sure you’ve done your homework. Make sure you understand your market and leverage and are level-headed in the moment.
Keep in mind that negotiation isn’t about beating your supplier into submission. It’s about finding a win-win solution that works for both of you.
An Ongoing Process
Cost reduction isn’t a one-time thing; it’s an ongoing process that will last the lifetime of your business if you want to gain as much profit as possible without cutting on value provided to customers.
