Cost reduction is often used to describe cost savings that are made during the purchasing process. However, it's much more. Cost reduction includes the savings that can be made by renegotiating contract terms and conditions and improving administrative and operational processes.
This blog post will summarize the cost-saving actions that you can implement in the short and long term.
This requires planning and possibly investing in resources. They can pay off in the long run!
Quick wins and short-term initiatives
1. Review current contract terms
A contract that has not been reviewed in more than three years should offer some savings opportunities. If a contract hasn't been reviewed in more than three years, there may be some savings to be made.
There is a chance that certain pricing is no longer competitive and there is room to revisit payment terms. Open discussions with suppliers regarding possible changes in purchasing frequency may lead to volume discounts.
Technology advances, economic environments change, and consumer consumption patterns alter. Benchmarking and market research provide a great opportunity to talk about pricing with suppliers.
2. Challenge Specifications
First, ask yourself if you really need the product or service. After determining the extent of need, you can review the design or specifications.
Many product specifications and packaging are based on proposals from suppliers or designed with a particular brand or supplier in mind.
The competition among suppliers is increased when requirements are based on performance or expected outcomes.
3. Eliminate maverick expenditure
Maverick expenditure is the term used to describe unauthorized purchases outside of agreed contracts. Maverick spending is sometimes called rogue expenditure or leakage.
This can represent a high percentage of purchases when there is no centralized purchase-topay (P2P). It can also be a major challenge for cost-saving initiatives.
This uncontrolled spending will be highlighted by a full-spend analysis, which will allow for better automated controls.
4. Challenge operational costs
A good procurement plan can reduce costs because it makes the most of administrative resources. Poor planning can lead to costly emergency procurement and high transportation costs.
You can reduce the transaction costs and paperwork by automating your internal P2P process, whether it is automated or not.
5. Review uncompetitive suppliers
When reviewing contracts, benchmarking can be used to identify similar suppliers that are not competitive.
You can either ask them to lower their prices to match the market, or, if that fails to work, you can move that spending to more competitive suppliers.
Maximizing procurement savings requires active management of strategic vendors and consolidation of the total number. A more efficient procurement process is achieved by managing fewer suppliers.
6. You can use the information you already have
It is important to have complete and accurate data before embarking on any saving initiative.
Information on past purchases can be used to highlight potential opportunities and motivate re-negotiation.
Long-term and medium-term initiatives
Here are some deliberate strategies that will take a little more time.
7. Investigate outsourcing
Outsourcing is the strategy of transferring non-core functions or activities in procurement to external specialists.
This is particularly useful for indirect categories of procurement such as facility management, security, and transportation. Cost reduction benefits include:
Cost savings due to economies of scale achieved by the outsourcing partner through aggregating customer requirements.
Outsourcing low value/high-volume purchases free up expensive internal resources.
Access to global market expertise and knowledge in categories with little or no in-house experience.
Specialists manage the time-consuming negotiation and contracting.
Outsourcing may be an effective way to reduce costs, but it has some downsides.
Many software solutions are available that can address the entire or part of the purchasing process in order to generate savings.
Cost reductions are possible by implementing P2P in procurement, spending analysis and AI.
Automation is designed to reduce costs through a reduction in human intervention during the onboarding of suppliers, assessment of supplier performance and management of day-to-day operations issues.
9. Implement Category Management
The primary objective of category management is to manage and group each type of expense holistically throughout the entire procurement cycle. Planning is essential when implementing a category structure.
This strategy allows procurement staff to spend their time more wisely and avoid wasting resources on transactional purchases. The total spend on a product or service can be used to increase the volume or scope of work offered to key suppliers.
The analysis of categories can help to identify cost-saving opportunities and quick wins.
10. Centralise procurement (or your procurement analytics)
Savings opportunities are hidden in a decentralized structure. Even if global procurement is centralized, there is a high risk of duplicate purchases and maverick expenditure.
Centralizing procurement allows for a global sourcing strategy that is unified. Implementing a global spend analysis tool can provide many of the benefits. A rationalized database of suppliers leads to greater competition between suppliers and lower supply costs.
11. Reduce procurement risk
A holistic risk management strategy is often implemented at the corporate level. Risk management is a key component of procurement, and it involves ensuring the right management controls are in position. This is especially true for emergency and ad hoc purchases.
A single supplier's dependence for a crucial item or service should be avoided at all costs.
Risk management includes a focus on cost avoidance, which is another way to save money. You can achieve this by, for instance, limiting price increases or getting more value out of existing contracts.
Every organization strives to reduce costs in the current economic climate. As you work to reduce costs, key suppliers can be valuable partners.
The number one priority in procurement is cost reduction. There are many ways of doing it, as we have shown.
Hard savings, or simple cost-saving methods such as risk management and cost avoidance are often preferred to "soft savings" like risk prevention and cost avoidance.
PiLog Group offers a wide range of services and solutions aimed at helping organizations achieve cost reductions, streamline procurement processes, and optimize supplier relationships. By leveraging their expertise, organizations can drive significant value and improve their overall financial performance.