4 Essential Steps to Lower Procurement Costs and Why Procurement Software Helps
Are you looking for strategies and ways to lower the costs of your procurement purchases?
Learning to keep costs down is a crucial aspect of effective procurement. This sole factor can make the difference between barely making profits and making a killing.
But when lowering costs, there’s something that you always need to have in mind - quality can’t be sacrificed.
Yes, it’s important to lower costs, but only as long as the quality is maintained. Your supplies need to consistently be of a good enough quality, and they also need to be delivered on time.
Then, how do we lower procurement purchase costs, while having that key consideration in mind?
Here are 4 essential steps that will help you achieve exactly that:
1. Acknowledge The Power of Data
To lower procurement costs, one thing is crystal clear - it’s all about collecting, analysing, and acting upon data. Without accurate data, your company’s potential to reduce costs is significantly diminished. You need data to manage vendors, to track stocks, to get a better understanding of raw materials, products, and services, and to make informed and effective decisions.
Your business needs to master Spend Analytics to get the benefits aforementioned. To do that, it needs to identify its sources of procurement spend analysis data, and assess the following questions:
Who are we buying from?
What are we buying?
At what rates are we buying at?
How much are we buying?
How does this purchase compare to other suppliers?
Does the quality meet our expectations?
How long did it take to deliver?
Cleaning up and organising data is also crucial. One of the best ways to achieve a more organised spend analysis is to keep all the data in a central database. Having your data across multiple databases and files makes everything much harder to manage and results in:
1. Higher operational costs
2. Higher risk of losing data or having inaccurate data
3. Less time for your team to focus on other activities
To keep data organised, using e-procurement software is a no-brainer. It keeps all of your data in a single platform, allowing you to upgrade your Spend Analytics game. Sure, e-procurement software has a price and can be relatively expensive for some companies, but there are affordable solutions that will bring huge returns on your investment due to the reduced operational and management costs over the long run.
2. Beware of Maverick Spending
Maverick spend is spending that’s unmanaged and unregulated. It’s sometimes intentional, such as when a company lacks a proper source / procure-to-pay process or when its members don’t follow the established procurement process for one reason or another, and at other times unintentional, such as when there’s a lack of proper communication and structure in a company. (which tends to happen to companies that don’t use e-procurement software)
Maverick spending costs time and money and doesn’t let you understand and identify how and what your company is spending on. Additionally, it can result in issues related to a lack of contract compliance.
Smaller companies with less established processes and systems are more likely to maverick spend than bigger companies, but even the latter face this common challenge.
To solve this challenge, implementing the right policies and processes is of paramount importance. Start by carrying out an in-depth spend analysis to precisely identify your company’s expenditures. Then, create a sustainable system that makes maverick spending easier to track and manage.
Here are a few tips to help you track and manage maverick spend:
- Implement e-procurement software: E-procurement software makes tracking much easier. It gives you a centralized management system that allows you to easily see purchases from a single platform. It also reduces operational costs and frees up time for your team to work on non-operational activities.
- Assign purchase cards: Purchase cards, or p-cards, are cards that allow goods and services to be purchased without having to go through the company’s procurement process. They can help you track small expenditures.
- Assign purchases to certain employees: By only letting certain employees make purchases, you can more easily track where the money is going to.
3. Reap The Benefits of Vendor Consolidation
Imagine if there was a procurement strategy that would magically allow you to spend less time managing your vendors while helping you get better rates and save money.
Well, that strategy exists, and it’s called vendor consolidation. Learning to implement it can result in an immediate increase in your procurement efforts’ effectiveness.
So, how does vendor consolidation work?
This supply chain management strategy consists of decreasing the number of vendors that your company works with. Instead of working with a large number of vendors, you focus on a few ones and build strong relationships with more favorable terms and rates.
This allows you to purchase goods and services at better prices while reducing the operational costs of juggling multiple suppliers.
Start by determining which relationships you can let go of. Spend some time identifying the most valuable vendors and negotiating for the best possible conditions.
Some benefits of vendor consolidation
- Less purchasing costs/Higher purchasing power
- Easier management and lower operational costs: This, plus the implementation of e-procurement software, results in huge operational savings.
- Better vendor relationships
- Lower transport costs
4. Improve teamwork and employee performance
Never forget that your organisation is run by people. The decisions that are taken within it and the quality of their execution all depend on them.
That’s why your employees, their performance, and how they interact with each other are crucial aspects of lowering procurement costs.
Picking the right individuals, as well as teaching them and training them to effectively and efficiently execute their responsibilities, should be very high on your to-do list.
But that’s not everything there is to it. Having a supportive work environment is just as important as having the right employees. It’s the second key element.
Here’s an example. Let’s say you want to hire somebody to cut down a tree for you. To succeed, you need:
- A sharp and ready-to-use axe
- Somebody who knows how to properly use an axe
Without a proper axe, not even the best lumberjack in the world will be able to chop down the tree for you. And even if you have the best axe in the world, there’s probably no way to make a chimpanzee chop down the tree.
The same applies to procurement. You need both the right personnel and the right tools. Train your personnel, invest in the right e-procurement software, and do whatever you have to do to have these two key elements in place.
ProcurementFlow.com is a digital workspace and collaboration platform that brings clarity and cost savings to procurement. It connects sales, procurement and suppliers and introduces an agile way of working. It effectively maintains process status and uses a logical workflow to move procurement projects quickly forward. Collaboration between different functions is embraced, supports supplier-led innovation and, most importantly, ensures that everyone in the team is always on the same page.