In today’s evolving economic climate, companies are facing increased pressure to cut costs and be more efficient. A growing percentage of revenue is spent on procurement due to the trend of outsourcing tasks as well as commodities expenditures. Since procurement has a huge impact on profitability, organizations found it wiser to start the cost reduction process from there. According to the Deloitte 2016 Global Chief Procurement Officer (CPO) study, 74% of CPOs are focusing on cost reduction as a strong business priority.
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. This post describes five ways to achieve a sustainable cost reduction in procurement so as to induce a significant increase in revenue:
- Conduct a Spend Analysis
A good way to start cutting cost is by conducting a spend analysis. APQC’s research indicates numerous areas in which organizations engaging in spend analysis perform better than organizations without spend analysis programs. The data from APQC’s Open Standards Benchmarking in procurement indicates that organizations with these programs perform better in the key areas of cost effectiveness, cycle time, process efficiency, and staff productivity. While the survey results do not provide direct causes for the performance differences, they give valuable insight into the more mature procurement processes and robust supplier relationships possessed by organizations that use spend analysis.
Through the spend analysis, organizations will gain valuable information and a greater visibility on the amount of money it spends. For instance: Expenses for purchasing materials/services, suppliers who incur large costs and also whether the suppliers meet the expectations of what is needed. Such information can be used to modify procurement processes and supplier list. At the end of the day, these changes allow the organization to adopt other more proficient procurement practices such as supplier relationship management and supplier category management.
- Effective Training
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 trainings such as e-learning courses, gamifications and simulations. The e-learning industry has been constantly growing in popularity for training purposes. According to Docebo E-learning market trends & forecast 2014 – 2016 report, the huge growth of the e-learning industry has been up to 900% since the year 2000. These training solutions prove to be an effective way to upskill employees.
For example, a procurement professional needs to walk on fine line as far negotiation is concerned. 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.
The first question a procurement professional should ask himself before making a purchase is: “Do we really need this service/product?” 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. For instance, to reduce the cost of consumption, a company can opt to forego business class flights to save cost or even use video conferencing instead of travelling. 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.
- Managing Supplier relationships
Supplier plays an important part in procurement. Having a significant plan about how to manage these relationships can have a major impact on cost savings. For instance: restructuring supplier relationships is a key factor to be considered. More value can be gained in terms of the relationships with suppliers through intense collaboration or by starting up partnerships with them. This can lead to mutually beneficial strategies resulting in cost-effectiveness. Exploring alternative suppliers is also a good way to save costs, especially if your current supplier is considered ‘high-priced’ within the industry. Finding alternative sources of the products and materials at a better cost will definitely have a good impact on savings.
An advanced negotiation skill is needed to deal with suppliers to minimize costs and tactfully maintain good relationships with them. A spend profile can be created for all the key suppliers to further save cost. The spend profile will consist of what’s being purchased and from which sources. All this will give a clear view about the expenses and whether the suppliers are really meeting the needs of the company.
- Total Cost Management
Decreasing demand of direct purchase expenses evidently leads to savings. It is also possible to assess the total costs related to the acquisition of products or services (total cost of ownership TCO) which can lead to positive impacts on the organization. For instance: optimization of total supply chain costs. With the introduction of methods such as JIT (Just-in-time), this area had enormously expanded. Reduction or elimination of transaction cost is also an important factor to be considered. It is all about limiting costs related to the process of ordering, receiving and paying for purchases. This can be done through vendor managed inventory, electronic ordering and invoicing. Automating manual sourcing and procurement processes will also lead to savings.
Significant cost savings can be achieved if different key factors within the procurement process are considered. This will depend on the ability of the CPO to inspire the workforce to collaborate together for a more cost-effective procurement. Saving costs also means saving time to focus on increasing profitability for the organization.