The purpose of any organization is to make profits in a sustainable way. Procurement plays an important role in achieving those recurrent profits. One of the most essential factors to consider for achieving the best business results lies in a cost-effective procurement and making savings. The aim of procurement savings are to drive down procurement costs, improve supplier terms and decrease product prices. A cost-effective procurement process would help a large organization generate millions of dollars of savings every year. Such an initiative can only be successful with the strong determination of CPOs followed by the commitment of employees to control costs. Before making any improvement, there is a need for awareness, analysis, acceptance and acknowledgement for the desire to change and take actions.
Consolidate Vendors Where Possible
Supplier management is critical to maximizing your procurement savings. By taking time to identify strategic vendors and consolidating the total number of vendors you work with, you can save time and money. Consolidation often means you can get volume discounts and higher quality, and because there are fewer suppliers to manage overall, the process becomes more efficient.
That said, you always want to have a couple back up vendors, especially for your mission-critical goods and services, in the event that your main vendor cannot fulfil your orders from time to time.
Reduce Your Deliveries
Make savings in delivery charges and the costs of accepting those deliveries. Processing the purchasing documentation and payment processing charges will also fall. On a similar note, it’s always worth looking at how deliveries can be consolidated to reduce cost. When working with the same supplier, see if you can reduce the number of separate deliveries you’re receiving by grouping your orders into one single delivery wherever possible; reducing cost and documentation. Many suppliers will also offer reduced-cost ‘eco’ delivery slots at times of the day/week when they’re most likely to be in your area.
Collaborate With Vendors
Because they are so focused on cutting their own costs in the low-price environment, many buyers often fail to acknowledge that their suppliers are being forced to do the same. Pushing for price reductions is necessary to maintain profitability during lean times, but pushing too hard may end up having negative ramifications for both parties in the long-term. In addition to short-term price cuts, operators can benefit by working with their suppliers to develop mutually beneficial strategies. Collaborating will help to identify opportunities for large-volume purchases – allowing buyers to receive discounts and suppliers to move inventory and maintain cash flow.
Use Technology to Reduce Communication Costs and Improve Efficiency
Use e-procurement software and other technology so you can communicate faster and more efficiently with your procurement department and suppliers. You’ll have improved access to supplier catalogs, giving you a better range of product choices that could lead to increased savings.
Focus On Reducing Long-Term Risk
Every business comes with risks, and one of the biggest ones you could face is supplier dependence. While you should aim to consolidate suppliers and vendors when possible, one of the key ways to manage risk is to ensure procurement doesn’t depend too much on a major supplier. Reducing risk in the supply chain is key to maximizing profits in both favorable and unfavorable economic climates. One way for operators to achieve that is to take into account the likelihood of having to operate under various market conditions by developing scenario-specific sourcing strategies.
For example, in a high-oil-price environment, for instance, being able to quickly procure products and services to meet increased demand is critical. This may require sourcing the same product from multiple suppliers. Proactively identifying those suppliers ahead of time can expedite time to market, reduce costs, and lower overall risk. It can also be beneficial in a low-price-environment, as it provides operators with the opportunity to evaluate multiple options and choose the one that best meets the financial and operational needs of their facility.
Avoid Spend Leakage
Spend leakage happens when spending occurs that’s outside the terms of the contract. Procurement should monitor all purchases for compliance with contract term, including payment terms. If any non-compliant purchases are made that cause spend leakage, procurement can work to put controls in place to prevent it from happening again.
Use Technology to Reduce Communication Costs and Improve Efficiency
Use e-procurement software and other technology so you can communicate faster and more efficiently with your procurement department and suppliers. You’ll have improved access to supplier catalogs, giving you a better range of product choices that could lead to increased savings.
Review replacement strategies
Renew items only when necessary and not as a routine replacement. Take care to factor in the cost of waiting for a replacement. So it is necessary to replace an important machinery part on a regular basis but it is not necessary to replace most lights before they fail.
Review Stock Levels
If you have a lot of stock sitting around in your warehouse, it’s not going to make any profit. Not only this, but it costs money to store it, and the longer it sits, the more deteriorated it becomes – and the higher chance it has of becoming obsolete. Keeping a close eye on stock levels ensures you’re rotating everything with the first in, first out principle, so there is little waste.
Good procurement function management is necessary to ensure your company remains profitable. Keeping an eye on procurement savings opportunities gives you more freedom in your budget to invest in other ways to help your company grow.
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