How to successfully reduce the cost of your procurement

Procurement

In the UK alone, expenditure on procurement costs throughout the country totalled £357billion in 2020-21.

All organisations need to procure goods and services to meet their demand, but these costs can quickly add up.

CFOs across industries and sectors are seeking new ways to control these procurement costs. We’ve written this extensive list of some key strategies you can take to reduce your procurement costs in the future.

Collate your current procurement costs data

The only way to reliably improve your operations is to have a clear visualisation of your current expenses. If you want to start reducing your costs, the first step is to get a clear understanding of where your organisation’s money is currently being spent.

This means collating all data related to your company’s past and current procurement. This is often what’s known as your procurement cycle.

Once you have this information, you can begin to look for patterns and areas where costs may be higher than necessary.

You can also use this data to benchmark your current costs against industry averages. This should give you a strong starting point for identifying areas where cost reductions could be achievable.

Obtaining this data ahead of time then allows you to instigate some of the more comprehensive cost savings strategies below.

Without first collating data, there’s no real way to save money. You need to know how much you’re spending now, to cut how much you spend on procurement in the future.

Conduct a spend analysis

Once you’ve collated your data, you need to conduct a spend analysis.

This is where you take this collated data and cleanse, classify, and analyse it in detail. Spend analysis aims to then give you a complete overview of your organisation’s spending patterns.

There are several ways in which you can conduct a spend analysis. One of the more popular approaches is what’s known as the ABC methodology.

This involves classifying items into three categories, based on their value to your organisation.

  1. A) items are those items which account for a large proportion of your total spend or value. They however represent a small number of individual items.
  2. B) items make up a moderate proportion of your total spend and represent a moderate number of items.
  3. C) items make up a small proportion of your total spend but represent a large number of individual items.

The ABC methodology combines inventory analysis with the ability to assess spending patterns. Once you’ve classified your items into these categories, you can then begin to look for areas where cost reduction may be possible.

For example, you may find that the majority of your A items are being supplied by one supplier.

You can then look into new approaches to your supplier relationships. Two effective solutions include supplier negotiations or what’s known as supplier consolidation.

Engage in supplier negotiations or supplier consolidation

These are two approaches that can each change your relationship with current suppliers.

Supplier negotiations involve reaching a new pricing agreement with your current suppliers. As a process, it’s also sometimes referred to as contract management.

This can be an effective way to reduce costs, but it’s important to always approach negotiations in the right way.

You need to first have a clear understanding of your current supplier contracts. You should also have a good idea of the average prices you should be paying for goods and services.

This is why it’s vital to collate your research and conduct a spend analysis beforehand.

It’s also important to remember that you may need to sacrifice some quality or service levels to get a better price. The result of negotiations, after all, always has to in some way benefit both parties.

Supplier consolidation is instead a way of reducing the total amount of suppliers you have and then cut costs. You first need to assess all the current suppliers you’re using and look at those you’d be able to eliminate.

To do this, you’ll need to review which suppliers provide the same, or at least adjacent, goods, and services. By consolidating, you’re able to negotiate fewer deals with a smaller number of companies.

This can help you attain better arrangements for procurement.

Invest in eSourcing solutions

Finally, the most reliable way to reduce costs in procurement is through eSourcing.

These tools are designed to provide a centralised piece of software for all your procurement needs. You’re able to handle the entire procurement process from one secure location.

This means you can easily track and monitor spending, as well as get real-time visibility of supplier contracts.

eSourcing tools also allow you to automate many of the tasks involved in the procurement process.

This includes issuing RFQs (requests for quotes), comparing supplier bids and awarding contracts.

Not only does this save you time, but it also helps to ensure that the entire process is conducted fairly and transparently.

Reliable eSourcing software should also apply to certain sectors. That may include housing, the NHS, or construction among others.

It’s important to find software that can provide support for your particular sector. This ensures you’ll have access to the solutions you need to access the most cost savings.

You will need to budget the cost of investing in eSourcing solutions against your current costs. This will add to your business budget outgoings each month. But the procurement costs that are offset as a result make these solutions a smart option.

Where can I find out more about reducing costs?

You should now know some of the key strategies to reducing procurement costs. These are however just some of the options available to businesses today.

If you’ve not yet invested in eSourcing solutions, this can be a logical place to start.

To find out more, or to access advanced eSourcing solutions today, make sure to request a free demo.