Reducing Procurement Costs - tips
Reducing your organization’s procurement cost is of the utmost importance. In a nutshell, cost reduction refers to cost savings made during a purchasing process. Cost reduction is built up of many factors such as re-negotiation of contract terms and conditions, administrative and operational process improvements and the use of data and artificial intelligence technology. Here are some of the strategies you can adapt to reduce your organization’s procurement costs:
Short term solutions
• Re-evaluate current contract terms.
Revisiting current existing contracts is a practice that every organization needs to adapt to. Any contract that has not been re-evaluated for more than 3 years should offer cost-saving prospects. It is a given that some pricing offered when the contract was signed has become uncompetitive and therefore it is necessary to revisit the payment agreements. Regularly communicating with your suppliers about changes in purchasing regularity can lead to discounts. Market research and changes in the economic environment provides an opportunity to discuss pricing with your suppliers.
• Do you require the service or product?
It is important that you ask this question – do we need this product or service. Once the questions have been put out in the open, review the actual need of the product or service and its stipulations. These services are based on supplier proposals or designed with one supplier or brand in mind.
• Cut off maverick spending
Maverick spending refers to the purchase of goods, parts or materials for a project, going outside of the accepted buying channels of the organization. If overlooked it can be a huge challenge to your Procurement Analytics Technologies-saving initiatives. Agilus data analytics web-based platform gives a full spend analysis that highlights uncontrolled spending.
• Strategic procurement planning
Strategic procurement planning is one of the best cost-saving initiatives. It helps reduce costs by making use of administrative resources. By properly managing your procure to pay internal processes through automation you can reduce transactional costs and additional documentation.
• Benchmark contracts with your suppliers
Reviewing your current contract with suppliers will reveal other comparable suppliers in your database that are not viable. It is an acceptable practice to approach these suppliers to reduce costs in line with the market. These suppliers can be removed by directing your spend on more competitive suppliers. Management of high-performance suppliers and grouping the total number of available suppliers is critical to enhancing your procurement cost savings.
• “Data is the new oil,” Use your historical data to your advantage.
Businesses that are top performers in their field use data analytics five times more than lower-performers. Accountable complete data is important when implementing a cost-saving initiative. Historical data on previous purchases and the performance of suppliers can influence price re-negotiation.
Medium-term solutions
• To outsource or not outsource?
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally. It is another procurement cost-saving initiative. The benefits of outsourcing are that you pay less for services that you would offer in-house due to the outsourcing company’s economic advantages.
• Implementation of IT systems
Implementing a data management and analytics system such as Agilus presents cost reduction opportunities. The system brings in data from multiple data sources and provides strategic and operational dashboards so that you can manage your procurement business, reduce costs, identify savings and create efficiencies. The vendor management module allows for efficient onboarding of suppliers and provides key insights into your procurement spend. All this is managed all in one platform online platform.
• Category management is key
Category management is an adapted approach in procurement where organisations group their spending into different areas which contain similar or related products or services allowing the attention of opportunities for consolidation and efficiency. Creating a category management structure is essential and allows procurement to use their time on more important performance areas and not waste resources on maverick spending. The total spend on one category can be used to your price negotiation advantages. Category based reporting can also reveal cost avoidance opportunities.
• Use data insights for smarter business decisions
With Agilus centralized Spend Analytics procurement system, areas of opportunities for cost savings are visible. Maverick spending is easily avoided as well as duplication of purchases. Implementing a spend analysis tool with Agilus can offer many benefits to aid in your procurement costs reduction efforts.
• Procurement risk management
Risk management is the process of identifying, assessing and controlling threats to an organization’s capital and earnings. This is a broad approach managed at the corporate level. Within procurement, risk management means implementing controls, especially for emergency purchases. Depending on one supplier for an important product or service is one of the biggest risks in procurement. There should always be a risk management strategy in place.
Avoiding unnecessary costs is also part of risk management. This is another cost-saving initiative and can be avoided by, for example maintaining or limiting the price increases from existing contracts.
If you would like further information about how to reduce your organization’s procurement costs through Agilus, contact us today.