Cost Reduction 101 - Comprehensive Guide to Procurement ...

Procurement Cost reduction strategies include vendor consolidation, reducing maverick spend, effective category & tender management and improved risk management ... Search COSTREDUCTION ComprehensiveGuidetoProcurementCostReductionbySimfoni’sProcurementProfessionals TableofContents IntroductiontoCostReduction Costreductioninprocurementistheprocessofreducingunnecessaryexpensestoincreasebottomlineandincreaseprofitmargin.ProcurementCostreductionstrategiesincludevendorconsolidation,reducingmaverickspend,effectivecategory&tendermanagementandimprovedriskmanagement. Nowmorethanever,costreductionhasbecomethenumberonefocusforbusinesses.Evenifthepandemicdidnotaffectyourbottomline,youmustlookforopportunitiestoimplementmoreexcellentcost-savingmethods.It’sessentialtoconductcostreductioninawaythathasinstantandlastingeffects.Onewaytodothisistomanageyourprocurementcosts.Thecostsassociatedwithacquiringgoodsandservicesfromexternalsourcesareakeyperformanceindicatorthatisvitaltoyourorganization’ssuccess.Why?Becauseprocurementcostsprovideastraightforwardandtraceablewaytomeasuretheperformanceoftheentireprocurementprocessandthebusinessingeneral.Thefewcostreductionessentialseverybusinessshouldknoware:Costreductionmustinvolvereducingandnotcuttingoutcostsentirely.Thereductionmeasuresshouldnotaffecttheprocessesandproductquality.Themanufacturingprocessshouldbechangedwithoutaffectingproductqualityornature.Costreductionshouldneverbeashort-termprocess;rather,itshouldbemoreofalong-termsolution.Asabusiness,thereareseveralwaysyoucanimplementthesecostreductionessentials.Butfirst,it’svitaltounderstandthedifferenttypesandcomponentsofprocurementcostsandidentifywhytheseexpensesoccur.  WhatisCostReductioninProcurement? Intermsofprocurement,costreductionreducesunnecessaryexpensestoincreaseanorganization’sbottomlineandprofitmargin.Whiletheimportanceofcostreductionconcerningotherstrategicbusinessgoalsisoftendebated,thereisnodenyingitssignificanceinprocurement.Weoftentalkaboutcostreductioninreferencetosavingsmadeduringapurchasingprocess;however,itismuchmorethanthat. Forexample,developingcost-savingstrategiesforanorganization’sprocurementprocessinvolvesseveralcomponentssuchas:Re-negotiationandrevisionofsupplierandvendorcontracttermsandconditions.Administrativeandoperationalprocessimprovements.Leveragingtheuseofdataandtechnology.Improvedriskmanagement.Categoryandtendermanagement.Reducingmaverickspend.Byimplementingcost-efficientstrategies,procurementmanagementteamscanoptimizeoperationalworkflowsandmaximizetheirprofitability. CostReductionvs.CostCutting Whilethesetwomayberelated,theyarequitedifferentconcepts.Cost-cuttingisastrategyputintoeffectbyacompanyasalastresort;costreduction,ontheotherhand,isnotassociatedwithnecessity.Unlikecost-cutting,wherethecompanyisforcedtoundergochanges,costreductionisavoluntaryprocessthatenhancesproductivityandprofit.Mostofthetime,cost-cuttingmeasurestendtobeharshcomparedtocostreduction.Soreductionisaboutreducingtheincreasingcostsandinvolvesstrategiesthatupliftthecompanyandhelpsitgrow.Ontheotherhand,cost-cuttingismoreofa“desperatetimesleadstodesperatemeasures”strategyandsymbolizesinstability. CostReductionStrategies CostReductionStrategiesinProcurement Whileseveralcostreductionandcost-cuttingstrategiesmayoverlap,somecost-cuttingtechniquesdonotapplytocostreduction.Thefollowingaresomestandardcostreductionstrategies 1.ModifyingSourcing Organizationscanmodifysourcingresourcesandprocurement,andthistendstobeatime-consumingprocess.Thisstepcaninvolveswitchingtocheaperalternativesorsourcingfromlocalproduce.Changingsourcingisundertakentoreducelong-termcosts.Insteadofbeingdependentononesupplier,thecompanyswitchessuppliersperiodicallyforcostadvantage. 2.ImprovisingProcesses Manybusinessessometimesdecidetoincorporateexpensiveprocesseswhichcanbeavoided.Improvisingtechniquestoeliminatecostsisoneessentialstrategyofcostreduction.Minorimprovementsinthemanufacturingprocesses,suchaspreventingwastesorwastemanagementprocesses,canhelpsavecostsinthelongrun. 3.UtilizingEnergy-SavingEquipment Businessesutilizealotofenergywhichtendstoincreasecosts.Findingenergy-savingequipmentorusingalternativesourcesofenergysavescostsovertime.So,forexample,somecompaniescandecidetosubstituteofficeprintersorstationerywithcost-savingalternativeslikegoingdigital.Thiswillnotonlysavepaperbutelectricityaswell. 4.HiringProcesses Themoreexperiencedanindividualis,thehigherthecostofhiringandmaintainingthemasanemployee.Hiringgraduatesorinternsforspecificfrontlineorbaselinepositionsismuchcheaper.Thecompanycouldthenfocusonstrengtheningitstraininganddevelopmentprocessestotrainrecruitsbetter.Thisalsogivestheindividualsopportunityandindustrialexposurewhilesavingalotofmoneyonremuneration. 5.ExpenseReduction Anotherstrategythatorganizationsusetoreducecostsistocutdownonexpenses. Anexamplecouldbetheuseofvideoconferencinginsteadofphysicaltraveltobringdowntravelcosts.Anothergreatexampleispromotingcarpoolingfortheworkcommute. 6.ProductAlternatives Bringingoutproductalternativesthatappealtodifferentincomesegmentsofthepopulationcanbeeconomicalinthelongrun.However,businessesmustnotcompromiseonproductqualitywhiledevelopingthefinancialproductalternative. WhyisCostReductionnecessaryinProcurement? Thereareseveraladvantagesandbenefitsofcostreductioninprocurement.Theseinclude:Profits:Fromthebaseline,costreductionincreasesprofitmarginswhichisthemostsought-afteradvantage.Acompanythatwillinglyorunwillinglyperformscostreductiontoincreasetheprofitswillhavemoremoneytoinvestinotherareas.Productivity:Costreductionincreasesproductivityatsomelevelsincetheunderperformingemployeesseethatthecompanypolicyhaschangedandmoreisrequired.Improvingstandards:Costreductionhelpsimprovetheprocurementprocesses’standardsbydirectlyaffectingthenatureofthecurrentprocurementmethods.Alltheseadvantagesareessentialforsuccessfulcostreductionimplementationinanorganization.However,whilecostreductiondoesoffersomefantasticbenefits,therearedisadvantagesthatyoushouldknow.Knowinghowthingscangowrongwithcostreductionwillhelpyoumitigatetherisksassociatedwiththeprocess. DisadvantagesofCostReduction: Costreductioncanbemistakenforcost-cutting:Thiscancausealarmthroughoutthecompanyasemployeesmaythinkthatthecompanyisgoingthroughafinancialcrisis.Notallchangeisgood:Sometimes,costreductioninvolveschangingprocessesthatmaybeharmfulandcauseadditionallossesinsteadofprofitsandimprovement.Theinitialimplementationmaybeexpensive:Whilethegoalofcostreductionistohavelong-termcostsavings,theinitialimplementationmaybetooexpensiveforsomeorganizations.Forexample,switchingtoalternativeenergysourcesmaybetoocostlyforsomebusinesses.Productqualityiscompromised:Focusingtoomuchoncostreductionmeasurescanreduceproductquality.This,inturn,willaffectthelong-termvisionofthecompanybyloweringthebrandvalue.Costreductionisadouble-edgedswordandshouldbehandledcarefully.Ifdonetherightway,itwillboostprofitswithoutaffectingthecompanysignificantly.However,itcouldbackfireandfailmiserablyifimplementedincorrectly. HowProcurementCostWorks WhatareProcurementCosts? Thebudgetforprocurementininventory-basedorganizationscanmakeupasubstantialportionoftheirresources.Theseelementsareallpartoftheprocurementprocess:PurchasePlanningSpecificationsAssessmentStrategicSourcing(supplierchoiceandagreements)FinancingNegotiatingPaymentTermProcessContractManagementVendorManagementInventoryControlTypicallythestepsinaprocurementprocessareasfollows:Recognizetheneedfortheproduct,whetherit’saneworderorare-order.Theprocurementdepartmentreceivesapurchaserequisition.Thedepartmentreviewsandapprovestherequestandsendsittotheaccountingdepartmentforapproval.Quotationrequestsaresenttoprospectivevendors.Thecompanynegotiatescontractswiththevendor.Thecompanyreceivesgoodsandservicesfromthesupplier.Theorders,slips,andinvoicesarereviewed.Paymenttothevendorisprocessed.Recordsarekeptforbookkeepingandauditing TypesofCostsinProcurement TypesofCostsinProcurement Generallyspeaking,fivedifferentcomponentsmakeuptheprocurementlifecycle.Allorganizationsshouldconsidertheseelementswhenaccountingfortheirannualprocurementcosts.Simplyaddinguppurchasingexpenseswillnotproduceanaccuratepictureofthetotalcost. 1.BaseCost Thekeycostdriverinprocurementistheper-itemamount.Formoresignificanttransactions,thisisespeciallytrue.Theper-itemamountisthemostconsiderableexpenseandtypicallythemostchallengingtoreduce.Thebestmethodtoreducethiscostistofindcompetingsupplierswiththesameproductsandnegotiatethebestpriceperunit. 2.CostofTransportation Transportationexpensesareadirectprocurementcost.Anorganizationneedstodevelopflexibleandlong-termrelationshipswithcarrierstonegotiatetermsforbetteringshippingrates. 3.ClosingCost Therearemanycostsassociatedwiththeoutsourcingofinventory.Theseincludeexpensessuchasbrokerage,legalfees(whenyouhirelegaladvisorstodraftcontracts),andcommissionsthattendtoaddup. 4.TaxesandDuties Thereareconsiderablecostsforinventoryoutsourcedfromoverseas,suchastariffs,taxesasflatrates(likeVATorGST),andmore.Importtaxesanddutiescanbecomplex,andorganizationswithoutthein-houseexpertisetomanagethemwillhavetohirebrokerstoassistwiththecustomsprocess. 5.NegotiationCost Creatinganagreementwithasupplierorvendorusuallyinvolvesadditionaltimeresearchingprospectivesuppliers.Thisexerciseleadstoindirectlaborcosts.Negotiatingwithsupplierscanalsobecostly,especiallyifyouhavestaffthathastotraveltomaketheagreements. HowdoeseffectiveProcurementReduceCost? Sonowthatweknowthatcostreductionisessentialandhasnumerousbenefits,howdoesitworkwitheffectiveprocurementplanning?Let’slookatsomenumbersfirst.AccordingtoanarticleonScribdprocurement-managedexpenditureaccountsforanaverageof65-75%ofmanybusinesses’outflows.Thisisaconsiderablepercentage,andineffectiveprocurementleadstopoordecisionmakingsuchasemergencyprocurementthatrequiresfastandexpensivetransportation.Regardlessoftheeconomicsituation,effectiveprocurementisgoodbusinesspracticebecauseitreducesunnecessarycosts.  ProcurementCostOptimization FundamentalsofProcurementCostSavings ImportanceofProcurementCostSavings Focusingonlyonprocurementcostsavingsisnotagoodlong-termstrategy.Thekeytosuccessistoimproveengagementamongallstakeholders.Oncethisisachieved,savingsareinevitable.Procurementcostsavingsarethemainfocusformanybusinessesforacoupleofreasons,themostimportantbeingtheyare:Easytotrack:Thisistheeasiestandmostobjectivewayofmeasuringprocurementperformanceifdoneright.Sothere’snodoubtwhythisisapopularwaytotrackprocurementperformance.Impact:Itdirectlyaffectsthebottomlinecomparedtoothermetricslikeriskmitigation. CostSavingvs.CostAvoidance Thisguidewouldnotbecompleteunlesswetalkedaboutthedifferencebetweencostavoidanceandcostsavings.Procurementshouldbetrackingbothtounderstandbettertheentirevaluedeliveredbyprocurement. CostAvoidance AccordingtotheCharteredInstituteofProcurementandSupply:“Costavoidanceisareductionincostresultinginaspendthatislowerthanwouldotherwisehavebeenifthecostavoidanceexercisehadnotbeenundertaken.”So,forexample,let’sassumeyou’repayinganinternetproviderforayearlysubscription.Thevendorsendsyouarenewalcontractthatincludesa10%increase.Youuseyournegotiationsskillstoavoidthe10%increasebysigningalong-termrenewalcontract.Thisiscostavoidance. CostSavings Costsavings,ontheotherhand,ismoretangible.Forexample,youcouldnegotiatedowntheper-unitpriceofanitemsothatyoursourcingisnowcheaper,thussavingyoumoney. WhataretheTypesofCostSavings? Beforediscussingprocurementcostoptimization,weneedtounderstandthetypesofcostsavingscommonlyfoundinmostbusinesses.Theseare:   1.HistoricSavings Refertochangesinunitpricesascomparedtothepreviousperiod.Historicsavingsarecalculatedbasedonabaselineoftheprioryear.So,forexample,itcouldbefromacriticalindicatorlikethepriceaveragefromtheyearbefore.Suchindicatorsarethencomparedwiththecurrentprice,andthedifferenceisthencalculated. 2.BudgetSavings Thesearederivedbasedonthedifferencebetweentheactualprice(priceontheinvoice)andtheplannedbudget. 3.TechnicalSavings Technicalsavingsareaconsequenceofchangesinthetechnicalspecificationofaproduct.Forexample,whenareasonablypricedalternativereplacestherequirementforanexpensiveproduct–thedifferenceinprices,asaresultofthischange,isknownasatechnicalsaving. 4.RFPSavings RFPstandsforRequestforProposal,anditiscategorizedasan‘avoidance’kindofsaving.Why?Becausethroughtherequestforproposalfromvarioussuppliers,thecompanycanchooseasupplierfromthesubmissionsreceived.Inmostcases,thelowestbidderistheonewhoisselected. 5.IndexSavings Thesearesavingsacquiredasaresultofexternalmarketdevelopmentswhichusuallyaffectsthepricesformaterialandservices. 6.RatioSavings Theseareacombinationofsavings.So,forinstance,itcouldbeacombinationoftechnicalandbudgetsavings. ObjectivesandMethodsofProcurementCostReduction,andhowcanyouLeverageThem? Theobjectiveofcostreductioninprocurementistobringdownthecostoftheentireprocurementprocess.Methodsofcostreductioncanbeappliedfromidentifyingsuppliersandvendorsrightthroughtothemanufacturinganddeliveryofthefinalgoodsorservices.Theimportantquestionstoasknowinclude:Whatmethodscanyouimplementtohaveasuccessfulcostreductionstrategy?Whatarethecostreductionstrategies?Howdoyouimplementacostreductionstrategy?Usingaccuratedata,workingcontinuouslyandsystematicallywithyourprocurementcostsiscrucialtorealizesavingsandimproveprofitability.Organizationsneedtoidentifycostdriverstoimplementprocurementmeasures.Rememberthatthesemethods,orlevers,cansimultaneouslyaffectseveralcostdriversduetolinkagesandinterrelationships.Dependingonhowmanyresourcesandtimeanorganizationhas,itcanimplementseveralshort-termandlong-terminitiatives.Let’sdiscussthemindetailbelow: Short-termInitiativesandQuickWins 8ShortTermStrategiesforCostReductioninProcurement 1.RevisitCurrentContractTerms Oneofthefastestwaystointroducecostreductionistochallengethetermsofanexistingcontract.It’sanacceptablepracticeinprocurementtorevisitcurrentcontractterms.Arrangementsthathaveexistedforalongtimeofferanothercost-reductionavenuefororganizations.Anycontractnotreviewedforoverthreeyearsislikelytohavesomepricingthathasbecomeuncompetitiveandoutdated.Economicenvironmentschange,consumerconsumptionpatternsshiftandtechnologyisadvancingatanalarmingrate.Organizationsshouldnotbeafraidtodiscusswithsuppliersaboutpotentialchangestocertainprocesseslikepurchasingfrequency;thiscanleadtovolumediscounts.Conductingmarketresearchandbenchmarkingwillprovideabetterforumforpricingchangeswithyoursuppliers. Youmustlearntonegotiatebettertermswithcurrentsuppliers,focusingonlowerpricesandconsideringcontractextensionstoachievelowercosts.Negotiationcanbeastrategicprocurementlever. 2.ChallengeSpecifications Thenextstepistofigureoutwhetheryouneedthisproductorservice?Oncethatissettled,analyzetheextentoftheneedandfurtherreviewthespecificationsordesign.Mostproductpackagingandspecificationsareoftenbasedonsupplierproposalsorsetwithoneparticularsupplierorbrandinmind.Supposetheorganizationcansetrequirementsbasedonexpectedperformanceoroutcome.Inthatcase,thiswillallowforincreasedcompetitionbyabroaderrangeofsuppliers. 3.ReevaluateNecessities Reevaluatingnecessitiesintermsofinventoryitemsorservicesisessentialtoensurethatitpositivelycontributestothebusiness’sprofitabilityinthelongrun.Procurementmanagementteamsshouldanalyzetheextentofcustomerdemandforanyparticularitem.Thishelpsthemtoseeifanyimprovementscanbemadetoreduceproductionorsuppliercosts.Somecompaniesneedtoadoptstandardizationtoreducevariety.Forexample,supposeacompanyissupplyingasinglebrandofvehicles.Inthatcase,sparescompatibilitywillkeepinventorystoragecostsataminimumcomparedtothecostsforanorganizationwithfivebrandsofcars.Furthermore,economiesofscalecanbeachievedduringthesourcingprocess. 4.EliminateMaverickSpending Maverickspendingisdefinedasunauthorizedpurchasingoutsideagreedcontracts.Sometimesitisalsoreferredtoasroguespendingorspendleakage.Maverickspendingcanaccountforalargepercentageofpurchaseswhenthereisnocentralizedpurchase-to-pay(P2P)procurementprocess.Thiscanbeasignificantchallengetoanycostsavingsinitiative.Why?Thesepurchasesaremostlikelynotincludedinanysupplierdiscountsthatmayhavebeenestablishedpreviously.Toavoidthis,procurementmanagementshouldensurethatallpurchasesarecompliantwithsuppliercontracts.Managementshouldalsoensurethattheorders’pricesarepre-approvedbytheorganization.Usually,spendanalysiswillhighlightwhereuncontrolledspendingoccurssothatcontrolmeasuressuchaspurchaserequisitions,e-catalogsandpurchaserequisitionscanbeimplementedtoreducemaverickspending.Ensurethatyougoovertheprocesswithyourteamsotheyknowhowtohandleeverythingcorrectly. 5.ChallengeOperationalCosts Effectiveprocurementplanninghelpsreducecostsbyensuringthebestuseofadministrativeresources—poorplanningresultsinexpensiveemergencyprocurementactionsandhightransportcosts.OrganizationsneedtostreamlineinternalP2Pprocesses.Whetherautomatedornot,thiscanreduceoperationalandtransactionfeesandadditionalandunnecessarydocumentation. 6.PlanAhead Havingaproperprocurementplaninplaceallowscompaniestounderstandbetterhowtousetheirresourcesandtimebest.Thisminimizesinstancesofemergencyproductpurchases,which,canbeexpensiveduetoexpediteddeliverycosts 7.AssessSuppliers Procurementteamsshouldregularlyassesstheirvendorsandsupplierstoensuretheirpricesforproductsandservicesalignwithmarketvalues.Transparencyisessentialwithinsupplierrelationshipssothatcostsarekeptwithinacompetitiverange.Wealsorecommendthatprocurementmanagementimplementaneffectivesuppliermanagementsystemandminimizethenumberofvendors.Thiswillhelpreduceprocurementcostsandenhancewarehouseefficiency.Assessingsupplierswillhelpyouidentifywhethertherearesimilarvendorsinyourdatabasethatarenotcompetitive.  8.LeveragetheUseofData Dataiscrucialtocostreductioninprocurement.Itisrelatedtosales,purchaseorders,customerdemand,andsupplierperformanceandcanrevealopportunitiesforfurthersavings.Sousethedatayouhaveonpastpurchasesandsupplierperformancetodrivere-negotiationefforts.Forexample,ifaparticularproductisdecreasinginpopularityamongcustomers,retailandprocurementmanagerscanre-negotiatewiththeirsupplierstoreducethewholesaleprice. Medium-andLonger-TermInitiatives Medium&LongTermStrategiesforCostReductioninProcurement Mediumandlonger-termcost-cuttinginitiativesareusuallyimplementedfor4to10years.Unlikethequickcostreductionmethodswe’vediscussedabove,thefollowinginitiativesareusedtosteerthecompany’sfuture. 1.InvestigateOutsourcing Outsourcingcanbedefinedasastrategythroughwhichnon-coreprocurementactivitiesorfunctionsarehandedovertospecialistexternalproviders.Insimpleterms,outsourcingisthepracticeofprocuringservicesorgoodsfromanexternalprovidersuchasaforeignsupplier.Dependingontheindustryandthebusiness,outsourcingcanbecost-efficientbecauseitreduceslaborandrentexpenses.Moreover,outsourcingisespeciallysuitedtoindirectprocurementcategoriessuchassecurity,transportation,facilitiesmanagement,security,andlogistics.Forprocurementpurposes,thecostreductionbenefitsinclude:Accesstomarketknowledgeandglobalexpertiseincategorieswherethereislittletonoin-houseexperienceorcapacity.Lowercostsbecausetheoutsourcepartner’seconomiesofscalecombinecustomers’requirements.Outsourcinglow-value/high-volumepurchasesfreeupexpensiveinternalresources.Time-consumingnegotiationsandcontractingaremanagedby.Businessesshouldensurethattheyanalyzethecostofinsourcingcomparedtoexternalspendandthecostofoutsourcingcomparedtodoingitinternally. 2.UsingTechnology Technologycanfindsolutionsthataddressallorpartoftheprocurementprocess,inawaythatreducescosts.ThereisavarietyofadvancedsoftwareforcostreductioninimplementingP2P,spendanalysis,e-procurement,includingRFPmanagement,e-catalogs,ande-auctions.Additionally,insupplierrelationshipmanagement(SRM),anonlineself-serviceportalstreamlinesthecommunicationprocessbetweenbuyerandseller.Bycuttingdownonhumanintervention,businessescanreducecosts.Let’sdiscussreal-lifeexamples.Simfoni’sinventorymanagementsoftwareisatoolthatcansimplifyinventorycountsandtrackyourorganization’sexpensesovertime.Thisprovidesvisibilityintohowmuchwasteyouareproducingandwhatadjustmentstomaketopreventit.Intermsofinventory,inventory-specificsolutionscanhavesuggestedorderingfeatures.Itcollectssalesdata,currentinventorylevels,andsupplierdeliveryschedulestoalertbusinesseswhentheyneedtoreplenishaproduct.Thiswillfurtherenableorganizationstopreventunnecessaryspendingduetoover-ordering. 3. ImplementCategoryManagement Forprocurementcostreduction,themainobjectiveofcategorymanagementistogroupandmanageeachtypeofexpenditurecomprehensively.Implementingacategorymanagementstructurethroughtheentireprocurementlifecyclerequirescarefulplanning.Whencategorymanagementisinplace,itallowsprocurementteamstousetheirtimewiselyandnotwasteresourcesonrepetitivetransactionalbuying.Thisway,totalspendonacommodityoraservicecanbeleveragedtoofferlargervolumesorscopetocriticalsuppliers.Awell-definedcategory-basedanalysiscanbringcostreductionopportunitiestotheforefront,andprocurementmanagerswillbeabletonegotiatelowerrateswithsuppliersandavoidwastingresources. 4.CentralizeProcurement Keyareasofopportunitysavingsarenotvisibleinadecentralizedprocurementstructure.Thelikelihoodofduplicatingpurchasesandmaverickspendingishigheveniftheglobalprocurementorganizationiscenter-led.Acentralizedprocurementstrategyallowsonedepartmenttohandleallpurchasingdecisions.Thisway,theorganizationhasaunifiedglobalsourcingstrategy.Havingacentralizedsystemcanalsoprovideotheropportunitiesforsavings,suchasreducingthenumberofstaffandtrainingnecessaryforprocurementteams.Moreover,arationalizedsupplierdatabaseleadstoincreasedcompetitionamongsuppliersandreducedsupplycosts.However,implementingaspendanalysistoolgloballycanalsooffermanyofthesamebenefits. 5.ReduceProcurementRisk Everyindustrycomeswithrisks,andoneofthebiggestonesanycompanycouldfaceissupplierdependence.Whileorganizationsshouldaimtoconsolidatesuppliersandvendorswhenpossible,oneofthekeywaystomanageriskistoensurethattheprocurementprocessdoesn’tdependtoomuchononesupplier.Onewaytomitigatethisriskisalwayshavingabackupsupplieravailabletocovertheessentialgoodsandservicesrequiredtokeepoperationsrunningsmoothly.Furthermore,partofriskmanagementalsomeansfocusingoncostavoidance,suchasnegotiatingcontractswithvalue-addedserviceslikeextendedwarrantiesorfreeshippingtosavemoney.Theroleofriskmanagementwithinprocurementistoensurethatcorrectmanagementcontrolsareinplace,especiallyforemergencyorad-hocpurchases.Thismeansorganizationsshouldbepayingcloseattentiontocontracts,followingupwithsuppliers,andtakingactiontoavoidlogisticalissues. 6.CostSavingsbyReducingConsumption Thedatashowsthateverydollaryouspendonsupplymanagementprovidesareturnof$6.77.Iforganizationsdecreasedemand,theycanachievecostsavings.Thiscanbedonebyreducingoverallconsumptionandtakingcost-cuttingmeasurestoeliminatehiddencosts.Thisisasignificantfactortoconsiderwhenyou’rebuyingthingslikelaptops,smartphones,orleasingcompanycarsforstaff.It’simportanttoevaluatewhetherallbusinesspurchasesarenecessaryandestablishfollow-upofpolicies/guidelinestominimizeover-consumption. 7.Up-SkillEmployees Employeesareacompany’sbestresource.Spendingmoneyontrainingemployeestomakebetterdecisionscanimproveyourbottomlineovertime.Forexample,investingintrainingtoimprovenegotiationskillscanimprovesupplierrelationshipsandeasiercontractmanagement.Overall,reducingexpensesandimprovingcashflowusingshort,medium,andlong-terminitiativesshouldbeagoalwhenimplementingcostreductionmeasuresinprocurement. HowdoyouCalculateCostSavingsinProcurement? Unfortunately,costsavingscannotbemeasuredusingonestandardformula.Additionally,procurementisnotanisolatedprocessbutincorporatesotherdisciplinesonwhichitispartiallydependent.Thismakesitcomplicatedtomeasureandgaugetheactualvalueofcostsavings.Inprocurement,costsavingsarealwaysviewedasanegativechangefrompreviouscostscomparedtothenewnegotiatedprice.Withoutapriorcostreference,costsavingscouldbecalculatedfromthefirstofferreceivedormarket-relatedbenchmarks.Sohowdoyoucalculatecostsavingsinprocurement?Expertsusetheaveragepriceofallreceivedquotesandsubtractitfromthenegotiatedcontractprice.Thisvalueisthenmultipliedbytheactualnumberofitemsboughtinacertainperiod. HowtoOptimizeProcurementCosts Evenifyourbusinessisnotsufferingafinancialcrisis,itisalwaysessentialtofindcost-savingopportunities.Thisapproachwilloffertheorganizationleveragewhennegotiatingwithsupplierstogainreductionsinreturn.It’srecommendedtoworkwithexistingsuppliersincreatingrealandlastingcostreductionsbecauseyou’vealreadyvettedtheircapabilitiesconcerningwhatyourequire.Ifyouweretofollowthetraditionalcostsavingsroute,theprocesswouldlikelyinvolveyoumakingatender,negotiating,selectinganewsupplier,implementing,andthenmayberealizingcostsavings.Thechallengewiththisapproachisthatittakestimeandsignificantresourcestodothis.Thistimelagoncost-savingisnotadesirableoutcome.Costoptimizationinitiativesaimatgettingthebestvalueforspending.However,anysignificantchangesincoststructurerequirebigchanges.Procurement’sroleisnotlimitedtonegotiatingthebestpricingandtermsforallyourpurchases.Forproperoptimization,sourcing,procurement,andvendormanagementteamsneedtotakeitfurther.WhatwearepresentingtodayinsteadareconcretesuggestionsonhowcompaniescanreducecostseffectivelyusinginitiativesaimedtowardsexistingsupplierswithoutrunninganytendersorRFQprocesses.  StepstoOptimizeProcurementCosts: 1.RemoveUnnecessaryCosts Analyzeandfigureoutwhichcostsyoudon’tneed.Inmoreprominentorganizations,thereissometimesalackoftransparencybetweendepartments.Theindividualswhoapproveandpayforproductsandservices(externalcosts)andthosewhouseandutilizetheassociatedproductorservicearenotincommunication.Communicationisakeyingredientincostoptimization. Moreover,it’simperativetoidentifytheproductsandservicesthatarenotinuse.Thiscanbeachievedindifferentways.Forexample:ITspend:it’sessentialtoidentifythespecificservicesormodulesthatarenotbeingused.ThebestwaytoachievethisisbymakingalistofalltheITsolutionspurchasedbyyourcompany.Directspend:Identifyandmeasureyourstockturnoverrate,splitdownpersupplierandproduct.Rankallsuppliersandproductsaccordingtostockturn.Forsuppliersandproductswiththeloweststockturnover,youmayneedtoanalyzetheanswerstothefollowingquestions:Canthebusinessfunctionefficientlyifyoucutoffthisproductorsupplier?Areyouabletostopbuyingthisproductorfromthissupplier?Thiswillhelpyoumakeadecisiononwhethertokeeptheproductorsupplier. 2.Offeryourtopsuppliershelpinreturnforagreeingtoyourcost-savinginitiatives Byfocusingonyourtopsuppliers,youcanprobablycoverover60%ofyourtotalspendand,therefore,alargeshareofyourtotalcostreductionpotential.Meetwithyourtopsuppliersonlineforabusinessreviewmeetingtodiscusspotentialcostreductioninitiatives.It’svitalthatyoumakeitcleartoyoursuppliersthatyouintendonbringingsomethingtothetableandofferhelpinanywayyoucan,asidefromcostincreasesofcourse. 3.ReduceNon-ConformanceCosts Thesetypesofcostsarisewhensuppliersarenotdeliveringinaccordancewiththeexpectedquality,quantity,ortime.Toreducethesecosts,organizationscabstarttrackinganysuppliernon-conformanceexperience.Talktothepeopleinyourcompanyreceivingandusingthegoodsorservicesdeliveredbyyoursuppliers.Youshouldgetaclearerpicture. BestPracticesforProcurementCostReduction&ProcurementSavings Implementingprocurementbestpracticesforcostreductionandsavingswillhelpensurethatvendormanagementdecisions,sourcing,andprocurement,createmaximumvalueforyourorganization.Solet’slookatthefundamentalbestpracticesyoushouldbeawareof:Createaprimarycostoptimizationteam:Allprocurementelementssuchassourcing,procurement,andvendormanagementshouldberepresentedonacross-functionalteam,includingoperationalandbusinessleaders.Thisencouragestheexchangeofskillsandknowledge.Becomeatrustedauthorityinthemarketplace.Organizationsneedtoresearchandmonitormarketstoprovidestakeholderswithaccuratemarketintelligenceondevelopmentsandtrends.Thiscouldincludeinformationonnewservicedeliveryoptions,disruptivecompetitors,oremergingbusinessopportunities.Workwithintheorganizationalframework.Developaflexiblesourcingapproach.Forexample,contractnegotiationsforcertaincoreproductswillbeexpectedtoremaininplacefortenyears,whilesomeshort-termproductsmightonlyhavesix-monthsuppliercontracts.Sharecreditwhereit’sdue.It’sessentialtorecognizemarketleaderswhocontributetosustainablereductioninbudgetedspendingbasedonyourteam’ssourcinginsightsandmarketintelligence. Conclusion HowdoesSimfoni'sSpendIntelligenceHelpinCostReduction&Savings? AtSimfoni,weunderstandtherolethattechnologyplaysindigitallytransformingprocurementprocessesforbusinesses.Oursoftwarecan:Captureinformation,analyzedataforinsightsandautomateprocesses.Theincreaseincross-systemflowimprovesworkers’abilitytomakedata-drivendecisions.Helpyougainlevel4+visibilityonyourspendingpatternswithautomatedcategorization.HelpuserscanruntheirownRFxwithinthecompanyguidelinesusingalreadyapprovedvendors.Thiscapturesformerlymaverickspend,keepsbuyingcompliant,andreducestheworkloadoftheprocurementteam.FlipRequisitionstostartanRFQprocessthatautomatesthemanualworkofemailingvendors,collectingresponses,andrankingproposals.Gaininsightsonyourprocurementefficiencyfromyourexistingcontracts.Investigatecommonterms,whatisunder,andnotundercontract,andthepossibleriskofnon-compliance.Additionally,ourAI-poweredSpendIntelligencesolutionscanquicklydistillandorganizeyourcomplexspenddatatohelpyoudiscoveropportunitiesandsavings.Weofferreal-timevisibilityacrossallcategories,aswellasinsighttoidentifynewopportunitiesandhiddensavings,Moreover,supposeyouwanttomanageprocurementcostreductionandsavingseffectively.Inthatcase,ourspendautomationenablesbusinessestocutcostsandputsyouincontrolofthecoreandnon-corespend.Withautonomousbuying,vendorengagement,invoiceautomation,andadvancedanalytics,yougettocomposeyourperfectsolution. 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