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How to Reduce Procurement Costs

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, both internally and externally, with resources like fuel cards.

Below, Fuelmate has created a full guide to procurement cost reduction, including a list of our top procurement cost reduction ideas which we feel can help reduce costs regardless of the type of company you work for. These ideas can be implemented quickly should you require them, both internally and externally, with resources like fuel cards

Table of contents:

  • What are procurement cost savings?
  • What is classed as procurement costs?
  • Why is reducing procurement cost savings important?
  • What is the difference between purchases and expenses?
  • Methods for procurement cost saving
  • Procurement cost reduction: final thoughts
  • More interesting fuel card articles

What are procurement cost savings?

Procurement cost savings refer to the reduction in expenses that a company can achieve through its procurement process.

It involves implementing strategies and practices that help to optimise the procurement process, streamline supplier relationships, and reduce the costs of goods and services.

What is classed as procurement costs?

Classifying procurements costs 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.

Why is reducing procurement cost savings so important?

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.

Reducing Procurement Costs

What is the difference between purchases and expenses?

Many costs can occur within procurement, and differentiating between them can sometimes be tricky. Here are some examples to help you understand the differences between the two:

1. Purchase Cost

This refers to the price of the goods or services you are procuring. Expenses are the additional costs that contribute to earning revenue for the company, not including the cost of the physical items or services procured.

2. Purchasing expenses

Examples include client entertaining, IT equipment and company vehicles.

Methods for procurement cost saving

Below are our top ten 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 procurement cost 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 cost in procurement. 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, which can ultimately lead to reduce cost in procurement.

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 cost in precurement 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.

6. Equipment

Most companies need to provide IT equipment for their procurement team, with a laptop/computer and a mobile phone being the most commonly provided. However, does this equipment need to be brand new or state-of-the-art?

Doing some research into what software you will require can assist you in creating an ‘Ecosystem’ enabling your team to utilise synergies with certain brands. For example, if your team have Android phones, perhaps a cheaper, leaner option such as a Chrome Book might be an option. For those who are using powerful editing or creation software, perhaps an Apple Mac and an iPhone would be the best fit.

Another great way to get the best out of teams would be to use a project management tool, such as Monday, Microsoft Teams, or Jira. These products enable teams to assign tasks and mark them as complete, allowing everyone complete visibility of tasks, their progress and their completion dates.

Tip: Be sure to speak to an IT specialist or any consultants/representatives of the software brands you use. They may be able to recommend compatible IT equipment or brands that you would have never thought of for your IT equipment needs.

7. Fuel Cards

A great way to reduce your fuel costs, and also the administration involved when submitting these to HMRC, is to use business fuel cards. Fuel cards are an alternative payment method for fuel; they can save you money and help you keep track of mileage. Although many meetings are now taking place via web conferencing services, many companies still need to travel as journeys to building sites, for example, are still imperative. Using a fuel card can provide significant cost savings, due to potentially discounted fuel prices, and reduced administration time.

Tip: Fuelmate offers a range of different fuel cards based on a variety of company’s needs. We recommend you contact us in the first instance, as we offer tailored recommendations on the cards that will most benefit your business.

8. Company Vehicles

Running and maintenance costs of vehicles, particularly if your company has a fleet, can stack up very quickly. If you have a fleet, the chances are you will need every vehicle the company has. However, if you also have company cars used to go to and from meetings, does the business really need as many as you have?

Conducting a full analysis of your fleet can highlight any areas in which you can make efficiencies. Tools such as a fuel card analysis from an expert and vehicle telematics can provide you with valuable information on your fleet, such as mpg analysis and transaction reports. This will ensure your vehicles are being driven economically, and in turn, potentially reduce fuel costs. Vehicle telematics can also highlight drivers that are misusing company vehicles, which may also assist in reducing fuel costs.

By planning and scheduling meetings more efficiently and as in advance as possible, it could be possible that fewer cars are needed for these purposes.

Tip: Do you use the same vehicle insurer for all your vehicles? If not, this could be a great way to get a reduction by adding more vehicles to a policy. Also, when was the last time you changed insurers? New customers tend to get better deals, so switching things up by shopping around could help reduce your purchasing expenses in this area.

9. Client entertainment

Having to reduce team expenses on client entertainment can be hard, especially if you are trying to win over suppliers or clients initially. However, not all business meetings need to involve an expensive lunch or dinner. Try to review your spending on this from last year and, if you haven’t already, invest in software that allows you to easily keep track of any expenses in the team that relate to client entertainment.

Tip: If there are some meetings or instances where you feel you need to provide food or entertainment for the client, why not speak to a local caterer or deli and get lunch or dinner delivered to the office? If you agree to use them often, you may be able to agree on a reduced price.

10. Team bonding days

Team bonding and activity days are important for morale, so they can’t be cut out completely, but you can make them as cost-effective as possible by doing some research and getting organised. Often, you can get discounts for advance and also group bookings at activity centres and entertainment venues. All it takes is a little time to research and plan these.

Tip: Many adventure parks or activity venues are often owned by one company. Some of these offer deals depending on how many visits you make across multiple venues throughout the year. You could always ask other departments whether they would be interested in going to one for their team bonding day. That way, the business can reach the number of visitors required to get a larger discount. If you’re looking for some inspiration on what to do for team-building activities, then take a look at our blog post on the topic for a few new ideas.

people sat around table working together with laptops

Procurement cost reduction: final thoughts

Procurement cost reduction is a critical aspect of business operations that can significantly impact a company's bottom line. 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 posts to see if fuel cards could help your company significantly save on fuel costs.

More interesting fuel card articles

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