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.
Major sources of savings are:
- Stronger vendor consolidation
Supplier management: procurement identifies strategic vendors and moves towards vendor consolidation for purposes of volume discounts and higher quality.
2. Reduction of maverick spends
Procurement Process: procurement identifies the uncontrolled spend and assigns it to preferred suppliers and installs better processes.
3. Avoidance of spend leakage
Procurement monitors compliance to negotiated terms and puts proper controls in place.
4. Detection of opportunities
Category Management: procurement identifies innovations within the supplier market in order to decrease internal costs or boost sales with exclusivity agreements.
5. Improvement of risk management
Contract Management: procurement participates in the risk management by reducing the dependence of a major supplier. The contracting and follow-up of suppliers avoids logistical ruptures.
6. Less internal costs
Operational management: procurement helps to define transparent processes with less internal transaction costs and failure costs. With its comprehensive visibility of all spend and vastly improved data accuracy it gives a faster and deeper analysis of your supplier market.
7. Best price comparisons
Tender management: the bids of the suppliers are evaluated on their technical answer of the business requirements, but also on their whole life cost footprint. Procurement challenges by thinking out of the box.
Important elements to be considered to make procurement savings:
- Up-skill Employees
Training employees can improve the bottom line in a company’s income through the reduction of expenses. Training and development benefits not only the employees’ personal evolution but also impacts on the company’s productivity and profitability as a whole. The key is to find the appropriate trainings which will help employees take the best decisions for the company. For this to take place, it is important to implement engaging and innovative training solutions such as e-learning courses, gamifications, webinars and simulations.
For instance, a procurement professional has to know the best tactics for an effective negotiation. The struggle is between making the best deal for the company and at the same time makes sure that a good relationship is established with the suppliers. A good way to sharpen the negotiation skills is through advanced simulations and training. In this way, the procurement professional can apply his knowledge directly to his job. Procurement and Supply Chain Academy provide these kinds of role-based e-learning programs which allow learners to save time and be more productive in their jobs. As employees are the biggest asset of a company, investing in their professional development has been a proven way by global organizations to take the best cost-effective decisions.
- Cost savings in relation to demands
Decreasing demands prove to be an effective way to achieve cost savings. Since one of the main roles of procurement is to obtain goods and services in response to internal needs, it is important to start cutting costs from there. According to Caps research, for every one dollar you spend on supply management, it gives you an estimated return of $6.77. This leads us to understand that when you take the time to identify research, acquire and manage the products and services your company rely on, you are more apt to reduce expenses considerably.
Reducing consumption is an essential factor to consider when it comes to cost cutting. Making unnecessary purchases is often the result of economic growth of the business but this trend usually decreases when the situation becomes less positive. Cost reduction in terms of hidden costs such as specifications can lead to a considerable amount of savings in the long run. Some examples are lease cars, mobile phones or laptops.
- Reviewing supplier’s terms and discounts.
Ensure that a Master Agreement exists for all the suppliers. Discuss with your suppliers as to when you may make procurement savings by altering your purchasing patterns. It may be that by purchasing slightly more products your automatically receive a higher discount.
- Using technology to be quicker and cut down on communication costs
This also enables purchasers to access supplier catalogues and enhances the choice of products that may lead to purchase savings.
- Reviewing stock levels
Stock left in warehouses is not going to bring any profit. It costs money to store, can deteriorate and become obsolete. Therefore it is essential to always keep an eye on the stock levels.
Good management of the procurement function is crucial to a profitable company and procurement savings can only be beneficial. There are a considerable number of ways to make procurement savings; all staff and managers should be aware of them and trained to acquire the best skills and knowledge.