In this series freelance author and supply chain expert Elaine Porteous explores core topics in procurement. This post has some edits by the Sievo team.
Cost reduction usually refers to cost savings made during a purchasing process. It is much more than that. It includes savings made through re-negotiation of contract terms and conditions, administrative and operational process improvements, and the intelligent use of data and technology. This blog post is a recap of cost reduction actions you can take in the short-term, as well as strategies you can take in the longer term requiring thought, planning and possible investment in resources.
Short-term initiatives and quick wins
- Revisit current contract terms
It’s an acceptable practice to challenge the terms of an existing contract. Any contract not reviewed for more than three years should offer some savings opportunities. It is likely that some pricing has become uncompetitive and that there is scope for revisiting payment terms. Opening discussions with your suppliers about potential changes to purchasing frequency can lead to volume discounts. Economic environments change, consumer consumption patterns shift, and technology moves on. Market research and benchmarking provide an opening to discuss pricing with your suppliers.
- Challenge specifications
The first step is to ask the question – do we really need this product or service? Once that is settled, analyse the extent of the need and, on that basis, review the specifications or design. Product specifications and packaging are often based on supplier proposals or set with one particular supplier or brand in mind. Requirements based on expected performance or outcome allow for increased competition by a broader range of suppliers.
- Eliminate maverick spending
Maverick spending refers to unauthorised purchasing outside agreed contracts. It is also sometimes termed rogue spending or spend leakage. It can account for a large percentage of all purchases where there is no centralized purchase-to-pay (P2P) procurement process and can be a significant challenge to cost savings initiatives. Visibility from full spend analysis will highlight this uncontrolled spending so that controls such as e-catalogues and purchase requisitions can be implemented to reduce maverick spending.
- Challenge operational costs
Proper procurement planning helps reduce costs by ensuring the best use of administrative resources. Poor planning leads to expensive emergency procurement actions and high transport costs. By streamlining internal P2P processes, whether automated or not, you can reduce transactional costs and additional documentation.
- Review uncompetitive suppliers
The benchmarking process done when reviewing contracts can highlight other similar suppliers in your database that are not competitive. These suppliers can be approached to reduce their costs in line with the market or failing that, can be removed by moving that spend to more competitive suppliers. Active management of strategic suppliers and consolidating the total number of suppliers is critical to maximizing procurement savings. Fewer suppliers to manage leads to a more efficient process.
- Use the data you have
Clean, complete and timely data is critical for embarking on any savings initiative. Reliable information on past purchases and supplier performance can highlight opportunities and drive re-negotiation efforts.
Take a bite out of your procurement costs with these strategies.
Medium- and longer-term initiatives
- Investigate outsourcing
Outsourcing is a strategy through which non-core procurement activities or functions are transferred to specialist external providers. It is especially suited to indirect procurement categories such as facilities management, security, transportation and logistics. The cost reduction benefits are:
- Lower costs due to the outsource partner’s economies of scale by aggregating customers’ requirements
- Outsourcing low value/high volume purchases free up expensive internal resources
- Access to global expertise and market knowledge in categories where there is little in-house capacity or experience
- Time-consuming negotiations and contracting are managed by specialists
- Using technology
There are many software solutions that address all or part of the procurement process with the aim of generating savings. There are opportunities for cost reduction in implementing P2P, spend analysis, e-procurement including RFP management, e-catalogues and e-auctions. Less obvious is the area of supplier relationship management (SRM) where on-line self-service portals streamline the communication process between buyer and seller. It is possible to reduce costs by cutting down on human intervention in the process of onboarding suppliers, assessing supplier performance and managing day-to-day operational issues.
- Implement category management
The main objective of category management is to group and manage each type of expenditure holistically, through the entire procurement lifecycle. Implementing a category management structure requires careful planning. When in place, this strategy allows procurement to focus their time wisely and not waste resources on repetitive transactional buying. Total spend on a commodity or a service can be leveraged to offer larger volumes or scope to key suppliers. Category-based analysis can highlight cost avoidance opportunities and potential quick wins.
- Centralise procurement (or your procurement analytics)
In a decentralised procurement structure, the areas of opportunity for savings are not visible. The chance of duplication of purchases and maverick spending is high even if the global procurement organization is center-led. Centralizing procurement enables a unified global sourcing strategy. However, implementing a spend analysis tool globally can offer many of the same benefits. A rationalised supplier database leads to increased competition among suppliers and reduced supply costs.
- Reduce procurement risk
Risk management is a broad strategy often managed at the corporate level. The role of risk management within procurement means ensuring that the correct management controls are in place, especially for ad-hoc and emergency purchases. The dependence on a sole supplier for a critical item or service is one of the biggest risks in procurement and there should always be a mitigation plan in place. Part of risk management also means focusing on cost avoidance - which is a type of savings. This can be achieved, for example, by limiting the rate of price increases or obtaining more value from existing contracts.
In the current challenging economic environment, every organization is striving to reduce costs. Key suppliers should be developed as valuable partners working with you to keep costs down with the objective of e-catalogues both businesses financially sustainable.