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Procurement Cost Reduction Strategies that Companies Need to Know

Jun 5, 2019

With the economic environment becoming increasingly complex, companies have been compelled to focus on procurement cost reduction initiatives rather than simply increasing profit margins. However, procurement organizations are having a tough time bringing down procurement costs, improving supplier terms, and reducing product prices. They get too involved in finding the nickels and dimes and forget that the procurement cost reduction strategies are more about chasing dollars. Through this blog, we have tried to create awareness about different strategies that can help organizations to develop a holistic approach for an effective procurement cost reduction program. But before that let’s understand the procurement challenges that companies need to be aware of this year.

Challenges Companies Must Address to Achieve Procurement Cost Reduction

Supplier-management issues

Finding high-quality suppliers is one of the biggest procurement challenges that companies face today. Most companies select suppliers based on prices and fail to understand the role these suppliers can play in maximizing the performance of their organization. This not only results in different supplier related issues but also prevents the implementation of procurement cost reduction plans.

Reducing costs

Reducing costs is the primary aim of the procurement process. However, it can be a difficult task for companies if they have negotiated with their suppliers well up front. Companies need to deep dive into operations to achieve procurement cost reduction opportunities.

Accurate  data

As procurement processes are becoming automated, companies need accurate data to avoid mistakes during spend analysis, benchmarking or market research. Possessing inaccurate data can be a major setback for companies aiming to achieve procurement cost reduction.

Devising procurement cost reduction strategy requires accurate data.  Request a free proposal to know how our experts can help you with real-time insights.

Procurement Cost Reduction Strategies

Centralize procurement

Many times, duplication of purchases is high, impeding companies to achieve economies of scale. With a centralized procurement function in place, companies can easily analyze their expenditure and formulate effective procurement cost reduction strategies. Moreover, a centralized procurement strategy rationalizes supplier base, reduces supply costs, and helps in strategic supplier relationship management.

Review existing contracts

Often, contracts existing from a long time can offer cost reduction opportunities. Reviewing contracts that were implemented two or three years ago can help achieve cost reduction. The economic situation at the time of drawing the contract could have been different and there might be a need for the contract reviewal. However, while challenging existing contracts, it is advisable for companies to determine cost-drivers and target negotiations based on the current market situation.

Wondering how an effective procurement cost strategy can help you reduce procurement costs? Request a free proposal and access our service portfolio of procurement market intelligence solutions.

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Reduce supply chain costs

Supply chain mapping is imperative for companies at every stage of the supply chain to determine costs. Organizations with global supply chains must scrutinize the implication of Incoterms published by the International Chamber of Commerce (ICC) to avoid additional costs to the supply chain occurring due to the wrong use of Incoterms.

Moreover, companies can ensure the use of effective and efficient modes of transport by implementing  a better procurement planning process. This will lead to procurement cost reduction during emergency procurements.

Eradicate incompetent suppliers

Suppliers play a critical role when it comes to implementing cost reduction initiatives as they possess a thorough knowledge of cost drivers. Evaluating suppliers based on their performance and finding new and efficient suppliers can help companies to devise procurement strategies and reduce procurement cost. Suppliers not willing to implement any cost reduction plan should be eliminated from the database. Carrying out cost-benefit analysis and challenging the existing sourcing strategy is one of the best procurement cost reduction strategies that industries can follow in order to gain a competitive advantage.

Make efficient use of working capital

Managing the working capital of any organization is extremely important for procurement. Negotiating payment terms is vital to ensure the firm’s viability. To do so, companies must avoid advance payment systems (unless it forms a part of supplier relationship management) and reduce inventory costs. Companies in the manufacturing sector are further advised to adopt build-to-order systems rather than make-to-stock on costs to achieve procurement cost reduction objectives. Want to know how, request more information here!

How Can SpendEdge Help in Procurement Cost Reduction?

The experts at SpendEdge offer real-time procurement market intelligence that helps companies to make informed decisions. They streamline sourcing processes that enable crucial changes involving dynamic negotiations, new levels of transparency and identification of procurement cost reduction opportunities. With over 15 years of experience in procurement services, SpendEdge helps companies to redesign procurement capabilities, improve execution efficiency, and fast-track time to savings.

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