11 Cost-Saving Strategies in Purchasing and Procurement

Cost Saving Strategies Purchasing January 08, 2021

Hanh Truong

Writer

Developing cost-saving strategies for a business's procurement process involves many components, such as leveraging the use of technology and revising suppliers' contracts. By being cost-efficient, management teams can optimize operational workflows and maximize their profitability.

Depending on how much time and resources an organization has, they can implement various short-term and long-term initiatives.

Short-Term Strategies

Short-term strategies for cost reduction enable businesses to act quickly and achieve their goals, typically, within a year. Some of the best practices include the following.

1. Review Existing Contracts

Organizations should frequently revisit contracts they have with their third party suppliers and revise payment agreements, if necessary. This is important because consumer demand, technology, and economic environments consistently change, therefore, affecting sales and the initial prices of products.

Business owners should conduct market research and discuss with suppliers when planning to change current contract terms, such as purchasing frequency and pricing.

2. Reevaluate Necessities

Inventory items or services should be reevaluated to ensure that it makes a positive contribution to the business's profitability. Management teams should inspect the extent of customer demand for an item, as well as the product's design and packaging to see if any adjustments can be made to reduce production or supplier costs.

3. Avoid Maverick Spending

Maverick spending is when purchases do not follow defined procurement processes and are made outside of contract agreements. This can be costly for businesses because these purchases would not be included in supplier discounts that were previously negotiated and established.

To avoid this and protect a business's bottom line, management should ensure that all purchases are compliant with supplier contracts and that the orders' prices are pre-approved by the organization.

4. Plan Ahead

By having proper procurement plans, companies will have a better understanding of how to best use their resources and time. This will minimize emergency purchases of products, which can be expensive due to expedited delivery costs.

5. Assess Suppliers

Executives should regularly assess their vendors to make sure their prices for products and services align with market values. Transparency within supplier relationships will ensure that prices are appropriate.

It is also recommended that executives implement an effective supplier management system and minimize the total amount of vendors they employ. This will help reduce procurement costs and can enhance warehouse efficiency.

6. Leverage the Use of Data

Data related to sales, purchase orders, customer demand, and supplier performance can reveal opportunities for further savings. For example, if metrics show that a shoe wear design is decreasing in popularity among customers, retail managers can re-negotiate with their suppliers to reduce the wholesale price.

Long-Term Strategies

Longer-term cost-cutting initiatives are usually practiced for 4 to 10 years and are used to steer the company's future.

7. Consider Outsourcing

Outsourcing is the practice of procuring services or goods from an external provider, such as a foreign supplier. Depending on the business, outsourcing can be cost-efficient because it will reduce expenses for labor and rent. Additionally, purchasing low value or high volume products from an external source can be inexpensive, compared to prices from internal organizations.

8. Utilize Technology

There is a variety of advanced software solutions that can help companies reduce costs, as well as optimize business functions. For example, inventory management software is a tool that can simplify inventory counts and track a company's expenses over time. This provides the business with visibility into how much waste they are producing and what adjustments they can make to prevent it.

Inventory solutions also have suggested ordering features, in which it collects sales data, current inventory levels, and supplier delivery schedules to alert users when they need to replenish a product. This will further enable companies to prevent unnecessary spending due to over-ordering.

9. Carry Out Category Management

Category management is a strategic procurement process where a company categorizes similar products together and manages them as a unit. This will allow businesses to effectively manage their supply chain and minimize repetitive transactions.

If a business's category management program is well defined, managers will also be able to negotiate for lower rates with suppliers and reduce the waste of resources.

10. Centralize Purchasing

A centralized procurement strategy is when one department of an organization handles all purchasing decisions. This will prevent purchases from being duplicated and will minimize instances of maverick spending.

Having a centralized system can also provide other opportunities for savings, such as reducing the number of staff and training necessary for procurement teams.

11. Develop Risk Management Procedures

Oftentimes, emergency purchases will be necessary to keep up with customer demand and replace obsolete inventory. Having a risk management strategy will ensure that business teams have the correct protocol to control these issues and mitigate them from developing further.

For example, a risk management practice is to have a back-up supplier who will provide the same type of product or service, in case that the current provider is unable to. This will minimize any delays in the supply chain and reduce extra operating costs. Cost avoidance is another component of risk management. This refers to actions that help a company avoid future incurring costs.

Reducing expenses and improving cash flow is a goal that businesses across all industries have. By implementing long-term and short-term cost-saving strategies to a supply chain management system, organizations can create a healthy financial foundation.