Procurement savings can be made in a number of areas within a Purchasing Department. The aim of procurement savings are to drive down procurement costs, improve supplier terms and decrease product prices.
As you go through the methods to increase procurement savings below, consider which are the easiest methods that can make a big difference in your circumstances. Depending on what stage of cost management your organisation is, some will be 'quick wins' and some others will be 'hard to win'. Focus on 'quick wins', not on implementing them all.
1. Avoid/Reduce Maverick Spend
Maverick spending, also known as tail spend, or rogue spending, can account for up to 80% of purchases made in an organization that lacks a centralized purchase-to-pay procurement process.
As this spend is not yet managed by procurement, it might be a quick win, provided you can navigate well end-users & convince them of the benefits.
You can look through spend records to find any uncontrolled spending, then assign them to your preferred suppliers and go over your process with the end-users and your team.
2. Review Supplier's Terms & 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 you automatically receive a higher discount.
3. Consolidate Suppliers & Deliveries
Make savings in delivery charges and the costs of accepting those deliveries. Processing the purchasing documentation and payment processing charges will also fall.
4. Consolidate Purchasing Requests & Intervals
This cuts down on delivery costs and purchasing documentation.
5. Review Purchasing Requirements
This ensures that only strictly necessary purchases are made. It will cut down on excess costs and storage costs and is a good way to ensure that a company makes procurement savings.
6. Purchase from Agreed Catalogs
Ensure that only one brand or type of a product is purchased. Duplication can be expensive and is unnecessary. Higher orders from one supplier lead to better discounts.
7. Review Stock Levels
This helps in cutting down storage cost as stocks not only cost you money to deposit, but they can also deteriorate in time, sometimes becoming unusable.
Stock left in warehouses is “dead money”. It costs money to store, can deteriorate and become obsolete.
So before you place another order, first review your stock levels and try to use what you already have.
8. Review the Specification of Purchased Products.
Is it possible to buy a lower spec that will do the same job? For example it's a well-known story that NASA developed a sophisticated pen that could write in Space, whereas the Russians used a 5 cents pencil - Both accomplished same job (writing in Space) but at a huge difference in costs.
9. Review Stock Replacement Strategies
Renew items only when necessary and not as a routine replacement. Take care to factor in the cost of waiting for a replacement.
For example, it is necessary to replace an important machinery part on a regular basis but it is not necessary to replace most lights before they fail.
10. Ensure that Correct Management Controls are in Place
Adhere to them for ad hoc purchases in particular. Are the correct people ordering the right products for the job? This should cut down on excess or incorrect purchasing.
11. Train & Educate Staff on cost effective purchasing and encourage them to save money whenever possible.
12. Computerize/Use Technology
While in this day and age we'd think that most companies have a system in place - it is not entirely true. For example a Head of Procurement of an energy generation company with plants in 5 countries in Asia & Africa, was still using excel for certain buys.
While computerizing the purchasing process costs money to start with, by speeding up and simplifying purchasing, procurement savings should be made.
As part of using technology to achieve procurement savings, you can link the purchasing system to the inventory and accounting systems. This not only saves in staffing costs but also cuts down on mistakes.
Another use of technology is by organizing reverse auctions which is a very efficient way to drive down procurement costs. Top-performing companies take full advantage of software to streamline their procurement processes.
13. Improve Risk Management
Supplier dependence is one of the biggest risks an organization could face. One way to manage risk is to ensure your procurement process doesn’t depend too much on one single major supplier. This includes paying close attention to contracts, following up with suppliers, and taking action to avoid logistical issues.
Part of risk management also means focusing on cost avoidance. Procurement savings can be made by focusing on ways to reduce the rate of cost increases or negotiating contracts with value-added services (such as extended warranties or free shipping).
14. Ask Your Suppliers for Discounts
Often, you can make procurement savings by changing your purchasing patterns. Discuss with your suppliers whether they would be open to offer you a higher discount if you increase your order volume slightly or if you pay earlier than the normal payment cycle of 30 to 60 days.
Or just simply ask for that discount. You'll be surprised that just by asking for a discount quite a number of suppliers will be willing to accommodate at the least a small discount. Not bad just for asking!
First centralize disparate purchasing functionalities, which allows for savings in staff, processes and technology.
Second, centralize warehousing which can give great real estate and staff savings.
Good management of the Purchasing/Procurement Department is crucial to a profitable company and procurement savings
can only be beneficial. There are a considerable number of ways to make
procurement savings and all staff and managers should be aware of them
and trained in good procurement savings strategies.