As materials and services typically account for such a high percentage of organizational spend there is no getting away from the need to optimize that spend and the associated procurement costs. If you take a look under the hood of most businesses you’ll probably find some form of cost reduction activity underway to varying degrees of success.
There are reams of material online around how to structure your procurement costs and indeed there is a multitude of methods available from the humble category management approach (group like-minded spend and optimize the supplier selection) through to utilizing some funky technology like purchase-to-pay or blockchain.
There are however, some fundamentals that are ubiquitous as a means of reducing cost – here we list our choice of six which most companies can leverage in some form to reduce their procurement costs.
1/ Process simplification
Let’s face it some procurement processes can be unwieldy, they drive multi-level authorization when it’s not required, vary from department to department, allow a big bureaucratic process to focus on a 1 cent part and drive a multitude of other inefficiencies. While many companies will look immediately outside to drive cost down – there are many benefits in taking the time to develop a standard, efficient and appropriate procurement process.
2/ Competition/variety of suppliers
Again a fairly obvious activity. Where you want to drive value let the market do the work. While there are a variety of inputs that will drive the success of this approach (complexity of part, competitiveness of the market to the offer being put forward) it’s the first place that many businesses start with. Put out an RFQ to a group of suppliers and weed out the expensive ones.
3/ Contract compliance
Most medium to large businesses have a level of commercial contracts in place. It’s often surprising to see how much money is being leaked due to non-compliance to contract that isn’t’ followed up on. Within a lot of companies commercial gets a lot of upfront focus but once it’s there it withers on the vine until something significant comes along to require it being dusted off. However, in terms of overall compliance (yes, including the little stuff) The contract was likely put there for a reason so use it!
4/ Collaborate with product designers
I’ve seen this countless times where the designers, procurement team and suppliers may as well be at opposite ends of the globe. Communication between each member of the team (and I include suppliers here) works wonders at driving down costs. Working independently might seem a good idea (keeping suppliers at arms reach) but in the long run it’s fool hardy – they are likely to be the manufacturing experts of the part being designed and their insight on cost structure will pay dividends.
5/ Outsource….or Insource.
This one always causes debate and is often more central to the business strategy than something that makes fiscal sense (people can become emotionally attached to these decisions) but reviewing the sourcing options can often unlock value. Be wary thought transitioning often requires a level of expenditure so make sure you capture this within the wider savings calculation.
6/ Reduce risk
Risk is everywhere in Supply Chain and suppliers often mitigate it through increasing their costs. Doing a root and branch risk review and working with your supply chain to mitigate risks that are driving cost can assist in the delivery of savings. Be aware though risk management is never a one off task and requires a level of maintentance to do it justice.
So there are our 6 pointers for reducing purchasing costs – have some ideas of your own you’d like to share? Let us know in the comments section below.