Are you facing resource exhaustion in your procurement process and seriously considering uncovering hidden cost-saving opportunities? Deloitte’s latest survey reveals that companies can achieve up to 20% cost reduction through effective cost management. Cost reduction refers to savings during the purchasing process.
These savings are achieved through renegotiating contract terms, improving administrative and operational efficiency, and advancing technology by introducing automation that eliminates manual labor. Do you need advanced technology in the procurement process that can be a game-changer for your organization?
This blog explores 11 strategies for cost reduction by eliminating maverick spending from your procurement operations, including short term initiative for quick win and longer term approaches for sustainable success.
Short-term initiatives
1. Maximize Value by Revisiting Contract Agreements
The initial challenge for an organization is to revamp your contract terms. Every contract should be reviewed within three years and will definitely provide some saving opportunities.
There is scope for revisiting payment options as some pricing has become uncompetitive, opening ways for discussion with suppliers to purchase in a certain frequency that can provide volume discounts.
2. Revise Specifications to Cut Unnecessary Costs
Another procurement cost reduction strategy is to evaluate if your organization still needs certain products or services? If the answer is yes, thoroughly analyze with your team and consider phasing outdated and underperforming products.
Additionally, Product specification and packaging are influenced by suppliers. When these requirements are outdated and no longer align with your needs, explore a broader range of suppliers. Increased competition and supplier diversity can drive better pricing, contributing to sustainable growth.
3. Curb Uncontrolled Purchases to Reduce Costs
Maverick spendings are illegal purchasing outside the contracts. It is also known as rogue spendings, it includes a large percentage of buying where there is no centralized purchase-to-pay (P2P) and can be a significant hurdle in cost saving.
Full spend analysis based software will highlight this uncontrolled spending and make control more automated.The Hackett Group research discovered that organizations can save up to 15% on procurement costs by catering and reducing maverick spending.
4. Trim Operational Expenditures
Proper planning for the procurement process helps reduce cost making sure best use of administrative resources. Poor planning and unorganized approach leads to emergency actions and high logistic cost.
By adding the internal P2P processes, automated or not, you can reduce logistics and additional documentation cost.
5. Replace Uncompetitive Suppliers
The benchmark process is stimulated when contracts are reviewed and non competitive suppliers are highlighted in your database.
The suppliers who are unable to meet the desired expectation to reduce cost in line with the market can be removed by opting for more competitive suppliers.
Managing the active suppliers and consolidating the database of these vendors are essential for maximizing cost reduction in procurement. Fewer suppliers are easier to handle and leads to efficient processing.
6. Utilize Your Data to Maximize Efficiency
Saving initiatives are incomplete without clean and complete data. Reliable misinformation is crucial to have a track record of past records and supplier performance are accessed to pave way for high opportunities to drive re-negotiation where necessary.
Longer-term initiatives
With short-term wins out of the way, here are some more strategies that can take more time.
7. Investigate outsourcing
Outsourcing is the ideal wayout to transfer non-core procurement activities to specialist external providers. It is ideal for indirect procurement categories such as security, logistics, facility management and transportation. The cost reduction is beneficial in below mentioned areas:
- Lower costs due to the outsource partner’s economies of scale according to customers’ requirements
- Outsourcing low value/high volume purchases free up High-priced internal resources
- Can reach out to global expertise and market knowledge in categories where there is little in-house potential or credibility
- Time-consuming discussions and contracting are managed by experts
While outsourcing may be a good cost reduction strategy, it still has its drawbacks..
8. Using Technology for Cost Reduction
Procurement process is supported by numerous softwares with the aim of generating savings. P2P, spend analysis and AI works wonders in procurement and provide opportunities for cost reduction.
A report by Gartner identified that organizations using AI and automation in procurement can attain cost savings of up to 30% and improve efficiency by 45%.
Automation helps in cutting down human intervention in the procurement process of onboarding suppliers, assessing their performance and managing the operational issues.
9. Adopt Category Management
The category management is to group or align each expenditure comprehensively, through the entire procurement cycle. Adopting a category management structure requires careful planning.
Implementing the category management helps in focusing on time smartly and avoiding the wastage of resources for repetitive buying. Large volume or scope to key suppliers aids in reducing total spends through bulk orders.
10. Streamline Procurement with Centralized Management
In a decentralized procurement structure, areas of opportunity for savings are limited. Duplication purchases and maverick spending is high even if the global procurement is center-led.
Centralized procurement aids in unified sourcing strategy. Implementing spend analysis tools globally can be equally beneficial. A supplier database helps in increasing the competition and reducing supply cost.
11. Reduce procurement risk
Holistic risk management is a strategy often managed at the corporate level. The role of risk management within procurement means ensuring that the right management controls are in place, especially for ad-hoc and emergency purchases.
The reliance on a sole supplier for a crucial item or service is one of the biggest challenges in procurement and there should always be a mitigation plan in place.
Cost avoidance is also a part of risk management – which is a type of savings. This can be attained for example, by balancing the rate of price increases or obtaining greater value from existing contracts.
In the challenging global crisis, today every organization is striving to reduce cost. Those suppliers should be considered assets working to keep your cost down.
Final tips
Cost reduction remains the top priority for every procurement company, with various strategies available to achieve it. While soft savings, such as risk management and cost avoidance, may not be immediately visible on the balance sheet, they play a crucial role in long-term financial health and stability. It’s important to balance these with more straightforward cost-saving tactics.
Looking ahead, companies should focus on integrating these strategies into a broader procurement framework that considers both immediate savings and long-term sustainability. By adopting a holistic approach to procurement, businesses can not only reduce costs but also drive innovation, enhance supplier relationships, and ultimately gain a competitive edge.
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