How to Reduce Procurement Costs
Originally published on June 15, 2020
Procurement cost reduction is one of the best ways to make your procurement plan more efficient and ensures your business expenses remain within budget. There are many different purchasing cost reduction ideas that you can use to try and reduce the procurement costs within your department; however, you need to make sure you adopt methods that best suit your business and industry. Below, we have listed our top five procurement cost reduction ideas which we feel can help reduce costs regardless of the type of company you work for, and can be implemented quickly should you require it.
What is classed as procurement costs?
Classifying procurements costs is pretty simple; they are expenses that are used to manufacture or create the product you are buying or selling. Indirect costs are expenses or resources that may have contributed to the purchasing of the product but aren't directly linked to its manufacturing or creation. Examples of overheads include sales resources, office supplies, tax, procurement staff, etc.
What are procurement cost savings?
So, why is reducing procurement costs significant? Saving on just the cost of making a product alone, whether you are buying or selling this product, can have a surprising effect on a business as a whole. Procurement cost savings can trigger an increase in profitability, and for many companies, allows them to remain competitive.
Methods for reducing procurement costs
Below are our top five procurement cost reduction tips for you to try within your own company:
1. Use data to support negotiations
When meeting with a current supplier, be sure to do your research and use data-driven examples to help support your negotiations. Using up to date market research and competitor data to support your proposed reductions is an effective way to help persuade your current suppliers to reduce procurement costs. The data may take some time to prepare prior to the meeting. However, it will be worth it when used in your negotiations; after all, it's hard to argue with factual research.
2. Revisit your supplier's terms
There should be a master agreement that exists for all the suppliers that your company works with, which will help you see if your purchasing pattern could be more efficient and modified to reduce procurement costs. Or, you could always discuss this directly with your supplier and see if an increase in orders, or any other change to your current buying pattern, could influence the discount you receive on the purchasing price.
3. Review your purchasing plan and quantity
It may be that things have changed from when you first created your purchasing plan and that not all purchases on there are now necessary. Having frequent reviews of your plan and procurement requirements means that excess costs can be cut entirely or significantly condensed if quantities can be reduced considerably too.
4. Alternative products
While you are reviewing your purchasing plan, it is also good to look at the specification of products and whether this can be taken into consideration. Or, if a different product that provides the same functionality or can be used for the same purpose, would bring more savings overall.
Take fuel cards, for example, have your drivers' geographical routes or distances changed since you first ordered your company fuel cards? If so, then you may want to compare your current fuel cards with others to find out what the most efficient fuel cards for your business are, based on your drivers' new habits.
5. Involve other departments
Reducing procurement costs doesn't have to just stay within the procurement department. By involving other departments in the process, it can help to reduce costs even further. As an example, the accurate stock-taking of office supplies or related equipment in each department could affect the number of products that need to be ordered and, therefore, affect procurement costs.
For more ideas on how to make your entire procurement department more efficient through cost reduction, please read our step by step guide to successful fleet procurement. Or, for more information on the ways a fuel card will save you money, check out our dedicated blog post to see if fuel cards could help your company significantly save on fuel costs.