10 ways to generate procurement cost savings

Procurement is a critical business function, but it can also be a center for cost savings that affects the business-wide bottom line. Learn what you can do to generate procurement savings and achieve greater ROI from your procurement department.

PWC report that more effective management of third-party spend can save up to 12% on the costs associated with procurement. At scale, that can be a huge saving which impacts the business as a whole and transforms the procurement department into a much more financially productive proposition.

There are a wide range of ways that savings can be made in procurement, some simple to implement and execute, others more complex or time-consuming. Below are ten of the best procurement cost saving ideas for you to consider for your business.

1. Seek discounts

Provided you have good relationships with your suppliers, one of the first procurement cost saving ideas you should consider is seeking discounts on the goods you order from them.

Suppliers will often be amenable to a discussion about discounts for early payment of invoices or increased order quantity and depending on the scale of your business with them, even small discounts by percentage can mean large net savings. Solutions like dynamic discounting can help you to achieve these savings with minimal effort.

2. Reduce maverick spend

Maverick spend, defined as spend that is made outside of procurement policy, whether by unauthorized persons or from non-preferred suppliers, is often a source of inefficiency in the purchasing process.

Taking all possible steps to minimize maverick spend can therefore bring about significant savings. One of the best methods to do so is implementing stricter controls on who is authorized to make purchases, ensuring that the procurement department is involved in as high a percentage of purchases as possible.

3. Tweak your inventory approach

Inventory management is a critical business function that has ramifications on many other elements of operation, including procurement. Although it’s necessary to function as a business and is technically an asset, inventory can act more like a liability. It has an impact on the bottom line in the form of the real cost of inventory, and the more inventory you have above your requirements, the more it costs to store and manage.

Reviewing your approach to inventory management and replenishment can unveil insights that help you to save money on the costs that stock incurs.

4. Utilize procurement KPIs

It’s hard to make improvements without first having data, which is why it’s so important to track and monitor procurement KPIs that give you a better understanding of the departments’ performance. There are a wide range of KPIs that can provide valuable insights, from tracking the number of emergency purchases that are made to monitoring the number of cost increases from specific suppliers.

Setting KPIs and establishing a process of monitoring progress against them can be vital in assessing the overall efficacy of the department and can highlight areas that need improvement, in order to bring about further cost savings.

5. Consolidate spending

Especially for large businesses with significant procurement needs, unlocking economies of scale is one of the most effective cost reduction strategies. Generally, the more you spend with one supplier, the greater the opportunity to negotiate a discount.

This idea can be leveraged by considering how spend can be consolidated into fewer supplier agreements by sourcing more products from the same suppliers, instead of spreading your procurement across many similar vendors. Just be careful of negating the benefit of consolidated spending by paying a higher base price for the same product from a different supplier.

6. Regularly review suppliers

If you properly vet your suppliers and assess your options, it’s likely that at the point of onboarding a new one, they’re the best fit for your needs. However, this doesn’t necessarily mean the same thing will be true in 12 months’ time.

Appreciating that supplier relationships sometimes become unviable due to increased competition frees you to establish a system of regular supplier reviews. Consider implementing an annual or biennial assessment of vendor agreements with the aim of discovering if you’re optimizing your spend.

7. Reduce internal costs

As is to be expected, internal costs such as staffing or software can also contribute towards inefficiencies in the financial performance of the procurement department. There are therefore savings opportunities to be captured by analyzing where these inefficiencies lie.

There’s a delicate balance to be struck between human resources and automation to get the best bang for your buck. Arriving at that balance can allow you to cut internal costs where they’re not needed, which can effectively improve procurement’s ROI.

8. Review purchasing requirements

While a well-oiled procurement department is less likely to find any value in this method of generating savings, it’s worth mentioning that sometimes something as simple as reviewing whether you’re purchasing above and beyond your requirements can be instrumental in reducing costs.

Make sure to carry out regular spending reviews to determine whether there are any ways to cut down on purchases of non-essential products or equipment.

9. Integrate procurement automation

Aside from reducing staffing costs, selective or wholesale automation can also bring about efficiency in practically any business department, including procurement. In fact, there are several key areas of the procurement process that are particularly well-suited to being automated, opening up opportunities to streamline the entire department.

Automation can help businesses analyze their supplier base more seamlessly to find insights that can drive better relationships or improved payment terms, for example. Elsewhere, it can be used to automate purchase order generation, so that orders can be sent to suppliers more quickly.

10. Consider alternative specifications

Finally, when sourcing a certain product, strongly consider whether the specifications can be adjusted to achieve savings. Taking the example of laptops used so staff can work remotely, assess what the actual requirements are for optimal functioning and avoid spending above and beyond that specification.

This isn’t to say you should cut costs on every single purchasing decision to the detriment of quality or safety, just that you should think about whether you’re overspending on luxuries.