Eight strategies for procurement cost savings you should know

Procurement cost savings is not limited to finding cheaper suppliers or cutting corners. It is, in fact, a complex challenge that requires strategic planning, efficient processes, and the right tools. 

In this article, you’ll learn top procurement strategies that can turn this challenge into an opportunity for gains. With these strategies at your disposal, you’ll be well-equipped to optimize your costs and extract maximum value from your procurement efforts.

What is cost reduction in procurement?

Cost reduction is a proactive and strategic undertaking to identify and curtail expenses associated with the acquisition of products and services. It is the top KPI for procurement teams to achieve. 

The overarching objective of cost reduction is to minimize expenses without compromising quality and ensure the fulfillment of the company's operational requisites. It is imperative to have your procurement team and finance team aligned on contract management and external dynamics to calculate effective cost reductions.

Renegotiating contracts with suppliers is the prevalent approach to reduce costs. This entails procuring price quotations from multiple suppliers, comparing pricing structures, and conducting negotiations with the supplier offering the most favorable terms. 

Bulk purchasing is another viable strategy that you can leverage for getting cost-saving discounts.

Furthermore, you can collaborate closely with your suppliers to identify avenues for waste reduction and streamline production processes. Such collaborative efforts can yield tangible reductions in costs.

Why is cost reduction necessary? 

Cost reduction is crucial to manage your business resources as it ensures that you are buying products and services at the correct price. There are several other reasons such as:

Profits

Cost reduction directly contributes to increasing profits. By reducing the costs of procurement, production, and operations, you can increase profit margins. This allows you to reinvest in company-wide growth opportunities.

Productivity

By streamlining processes and eliminating waste, you can achieve higher output with the same resources. This increases the overall productivity of the organization.

Improving standards

Cost reduction often involves improving standards and processes to eliminate inefficiencies and reduce waste. This leads to better quality products or services, enhancement of customer satisfaction, and boosting brand reputation.

Cost reduction is NOT cost-cutting

It’s important to note that cost reduction is not the same as cost-cutting. Cost-cutting often involves indiscriminate slashing of budgets, which can lead to a decline in quality and morale. 

On the other hand, cost reduction is a strategic process that aims to reduce costs while maintaining or improving quality and efficiency.

Types of procurement cost savings

You can reduce costs in procurement through various methods, such as negotiating better prices with vendors, improving purchasing processes, and reducing waste. Here are two basic categories:

Supply-side vs. demand-side cost savings

Supply-side cost savings relate to the vendors you’re working with. This could involve replacing vendors with more cost-effective ones, renegotiating contracts with existing suppliers, or increasing supplier diversity and creating competition between service providers. 

Let’s assume a company uses a certain project management software that costs $20 per user per month. They find another software that offers similar features and quality but costs only $15 per user per month. By switching to the new software, the company saves $5 per user per month, which is a supply-side cost saving.

On the other hand, demand-side cost savings are more about internal opportunities to cut costs. ​​The same company analyzes its software usage and finds that many of its licenses are underutilized. 

For instance, it might have licenses for a graphic design software that’s only used by a few team members. By reducing the number of licenses to match actual usage, the company can achieve significant cost savings on the demand side.

Hard cost savings vs. cost avoidance

Hard cost savings, also known as “hard savings,” are tangible reductions that directly affect the company’s bottom line. This could involve actions that reduce the total amount spent on a given expense. 

Let’s say a company using a certain project management software that costs $20 per user per month. The company negotiates a new contract with the software provider that reduces the cost to $15 per user per month. The $5 saved per user per month represents a hard cost saving.

On the other hand, cost avoidance is not cost reduction. It involves actions that lower potential price increases so that a company does not have as many costs in the future. This is often referred to as “soft savings.”

Suppose the same company anticipates that the cost of its project management software will increase by 10% next year due to inflation. The company negotiates a fixed-price contract with the software provider that keeps the price at $15 per user per month for the next year. Even though the company is not spending less, it is avoiding an increase in costs, which is considered cost avoidance.

8 levers to reduce procurement costs

Here are the details of the eight levers that you must leverage to reduce procurement costs:

Negotiation

This involves negotiating better terms with current suppliers and focusing on lower prices. Build strong vendor relationships and consider contract extensions to achieve lower prices.

Tender process

Invite suppliers to submit a bid to supply products or services. Specify requirements in cooperation with users. Introduce new suppliers and expand the supplier base geographically. Consider larger order volumes, different delivery terms, and contract lengths.

Bundling

Bundle contracts to secure standardized terms with the same supplier throughout the organization. Bundle volume by consolidating spend and volume from one or fewer suppliers than the status quo, for example, within a spend category.

Optimize specifications

Standardize specifications for products/services or embrace industry standards. Change materials, raw materials, or components. Use suppliers actively in the process both in terms of expertise and input.

Reduce consumption

Evaluate whether all business purchases are necessary. Establish and follow-up policies/guidelines to minimize over-consumption.

Redefine the supply chain

Remove unnecessary intermediaries in the value chain that do not create added value. Assess ecommerce solutions and procure-to-pay (P2P) automation to streamline processes. Streamline inventory management.

Insourcing/Outsourcing (make-or-buy decisions)

Analyze the cost of insourcing compared to external spend. Analyze the cost of outsourcing compared to doing it internally.

Strategic partnerships

Integrate the value chain with important suppliers to improve efficiency. Enter into collaborative projects with key suppliers to identify win-win situations.

Reducing procurement costs in software procurement is a multifaceted process that involves strategic planning and efficient execution. By leveraging these eight levers, you can significantly reduce your procurement costs and gain profits.

Track procurement savings in real time with Spendflo

With the SaaS industry projected to grow to $700 billion by 2030, SaaS is becoming a crucial part of every business operation. 

Having an automated procurement tool such as Spendflo can be a game-changer to save costs, while you focus on the primary business goals. 

Spendflo offers a solution that can trim your SaaS procurement costs by up to 30%. By utilizing Spendflo, you can access the following advantages:

• Supplier contract management: Simplify the process of renegotiating contracts with suppliers to secure more favorable terms and pricing.

• Competitive price quoting: Easily request price quotes from various suppliers, enabling you to compare and choose the most cost-effective options.

• Bulk purchasing: Take advantage of cost-saving discounts by purchasing SaaS solutions in larger quantities.

• Vendor collaboration: Collaborate closely with your suppliers to pinpoint opportunities for reducing waste and streamlining processes, ultimately leading to cost reductions.

Curious about how to kickstart your cost-saving journey?

Book a free savings analysis today.

‍