The importance of purchasing in any company is largely determined by four factors:
- Availability of good
- Total purchase price
- Percentage of product cost represented by materials,
- The types of materials purchased.
Identifying Savings Opportunities to Lower purchasing costs and supplier prices
Most procurement departments have a good understanding of the most essential categories of goods and services that their organization purchases – the direct materials, subcontracted services, and other things that are close to the heart of the organization that the organization is in the business of doing.
Procurement savings can be made in several areas within a Purchasing Department. The aim of procurement savings is to drive down procurement costs, improve supplier terms and decrease product prices.
There are some quick wins that organisations can adopt for savings opportunities
- Avoid/Reduce Maverick Spend
Maverick spending, also known as tail spend, or rogue spending, can account for up to 80% of purchases made in an organization that lacks a centralized purchase-to-pay procurement process. This is a quick win if procurement can convince end users of the benefits of uncontrolled spend.
- Review Supplier’s Terms & Discounts
Ensure that a Master Agreement exists for all the suppliers. Discuss with your suppliers as to when you may make procurement savings by altering your purchasing patterns. It may be that by purchasing slightly more products you automatically receive a higher discount.
- Consolidate Suppliers & Deliveries
Make savings in delivery charges and the costs of accepting those deliveries. Processing the purchasing documentation and payment processing charges will also fall.
- Consolidate Purchasing Requests & Intervals
This cuts down on delivery costs and purchasing documentation.
- Review Purchasing Requirements
This ensures that only strictly necessary purchases are made. It will cut down on excess costs and storage costs and is a good way to ensure that a company makes procurement savings.
- Purchase from Agreed Catalogues
Ensure that only one brand or type of a product is purchased. Duplication can be expensive and is unnecessary. Higher orders from one supplier leads to better discounts.
- Review Stock Levels
This helps in cutting down storage cost as stocks not only cost you money to deposit, but they can also deteriorate in time, sometimes becoming unusable. Stock left in warehouses is “dead money”. It costs money to store, can deteriorate and become obsolete. Always review existing stock levels and try to use what you already have before placing new orders.
- Review the Specification of Purchased Products.
Is it possible to buy a lower spec that will do the same job? Can it accomplish the same job but at a huge difference in costs?
- Review Stock Replacement Strategies
Renew items only when necessary and not as a routine replacement. Take care to factor in the cost of waiting for a replacement. It is necessary to replace an important machinery part on a regular basis, but it is not necessary to replace most lights before they fail.
- Ensure that Correct Management Controls are in Place
Adhere to them for ad hoc purchases in particular. Are the correct people ordering the right products for the job? This should cut down on excess or incorrect purchasing.
- Change Management and Training
Educate users on cost effective purchasing and encourage them to save money whenever possible.
- Digital Transformation
As businesses race to adopt a new way of doing things in the face of disruptive technology, procurement leaders can use digital tools to build a more efficient bottom line and greater top-line growth. Review opportunities to automate downstream procurement activities. The focus of procurement will be on collaborating with a network of external partners to create new, innovative business models.
- Improve Risk Management
Supplier dependence is one of the biggest risks an organization could face. One way to manage risk is to ensure your procurement process doesn’t depend too much on one single major supplier. Review contracts and focus on supplier performance. Cost Avoidance is also part of risk management as there are ways to reduce the rate of cost increases or negotiating contracts with value-added services (such as extended warranties or free shipping).
Changes in purchasing patterns is another savings opportunity e.g, Volume discounts and changes to more favourable payment terms e.g. if you pay earlier than the normal payment cycle of 30 to 60 days. Another opportunity is to simply ask for a discount – A number of suppliers are willing a provide a discount.
Centralise disparate purchasing functionalities, which allows for savings in staff, processes and technology.
There are many opportunities for savings realisation within Procurement. Starting with the quick wins can deliver real results. The key capability for every step here is the data your organization already has. All that needs to be done is to establish the right processes to ensure that these savings are achieved.