Procurement is the process of defining the terms and circumstances under which products and services are acquired from external sources. Cost of procurement is a critical Key Performance Indicator (KPI) for supply chain management. This provides a straightforward method for evaluating the success of the whole procurement process, and because it is a cost-based KPI, it has a direct influence on global sourcing.
Procurement savings aim to reduce the cost of commodities (including their handling and delivery) while also enhancing the conditions of the supplier relationship. Reduced procurement costs can be an easy and immediate solution to boost profit margins without compromising the quality of items given to consumers.
There are several strategies firms may use to reduce these purchasing charges in global sourcing. However, it is critical to first understand the various types and components of procurement costs and why they occur.
Procurement encompasses the whole process of acquiring services or things for corporate operations, from vendor selection to product delivery. Procurement budgets can account for a sizable amount of the resources available to inventory-based firms.
Additionally, it is critical to highlight that the phrases purchase' and procurement' are frequently used interchangeably, even though they are not synonymous. Purchasing refers to the act of acquiring products on behalf of a business, whereas procurement encompasses the entire process of acquisition. Thus, the purchase is merely one of the several processes involved in the procurement process.
Generally, procurement-related expenditures are broken down into five distinct categories. When businesses total their yearly procurement costs, they need to include all of these factors since merely adding up purchasing expenses would not offer an accurate picture of the whole cost.
1. Initial cost
The cost per item is the primary cost driver in procurement. This is especially true for bigger purchases. It is the most significant expenditure and the most difficult to eliminate. The best course of action is to seek out other suppliers offering comparable items and negotiate the best unit pricing.
2. Transportation costs
These are directly related to the stock acquisition. Developing adaptable and long-term relationships with carriers is one strategy for negotiating favorable shipping arrangements.
3. Closing expense
Many businesses outsource their inventory purchasing and selling, which results in additional charges such as brokerage, legal fees (where legal consultants are employed to design contracts), and commissions.
4. Import and export taxes and duties
There are significant costs involved with merchandise obtained overseas, including government charges such as tariffs, flat-rate taxes (such as VAT or GST), and more. Due to the complexity of import taxes, many businesses use brokers to assist them with customs procedures.
5. The cost of the negotiation
Generally, negotiating a contract with a vendor will need additional time spent investigating possible suppliers, resulting in indirect labor expenses. Negotiating with suppliers may also be expensive, particularly if personnel must travel to strike deals.
Identifying high-quality suppliers is one of the most significant procurement difficulties facing businesses today.
Most businesses choose suppliers only based on pricing and are unaware of the critical role these suppliers may play in enhancing their organization's success. This creates complications with suppliers and precludes the implementation of procurement cost reduction programs.
The procurement process's primary objective is cost reduction. However, it might be a challenging undertaking for businesses if they have not bargained adequately in advance with their suppliers. Businesses must conduct an in-depth analysis of their operations to identify cost-cutting options in procurement.
With the automation of procurement operations, businesses want precise data to minimize errors during expenditure analysis, benchmarking, and market research. Inaccurate data can be a significant hindrance for businesses attempting to reduce procurement costs.
Developing a strategy for procurement cost reduction requires correct data. Request a no-obligation proposal to learn more about how our specialists can assist you with real-time insights.
It is acceptable to contest the terms of a pre-existing contract. Contracts that have not been evaluated in more than three years should present savings potential. It is conceivable that some pricing has become uncompetitive and that payment arrangements might be reconsidered.
Engaging suppliers in conversations about possible changes in purchase frequency might result in bulk savings. Economic situations alter consumer behavior changes, and technology advances. Market research and benchmarking allow negotiating with your suppliers about pricing.
The first stage is to determine whether or not this product or service is truly necessary. After that, determine the scope of the need and, on that basis, revise the specs or design. Product specifications and packaging are frequently developed in response to supplier offers or with a specific supplier or brand in mind. Requirements based on projected performance or outcome enable a greater range of vendors to compete.
Maverick spending refers to purchases made outside of agreed-upon contracts. Additionally, it is also referred to as rogue spending or spending leakage. It can account for a major portion of all purchases in organizations without a centralized purchase-to-pay (P2P) procurement mechanism, posing a significant obstacle to cost-cutting attempts.
Full spend analysis will expose this uncontrolled expenditure, allowing for the implementation of controls such as e-catalogs and purchase requisitions to rein in maverick spending.
Appropriate procurement planning contributes to cost savings by ensuring the most efficient use of administrative resources. Inadequate preparation results in costly emergency procurement measures and increased transportation expenses. By automating or not automating internal P2P procedures, you can decrease transaction costs and unnecessary paperwork.
When analyzing contracts, the benchmarking method might identify additional similar suppliers in your database that are not competitive. These suppliers can be addressed to decrease their costs to market levels or, if that is not possible, they can be eliminated by shifting spending to more competitive suppliers.
It is vital to manage strategic suppliers actively and consolidate the total number of suppliers to maximize procurement savings. With fewer vendors to oversee, the process becomes more efficient.
Outsourcing is a procurement approach in which non-core procurement operations or responsibilities are outsourced to external specialists. It is particularly well-suited to indirect procurement categories such as property management, security, transportation, and logistics. The following are the cost-cutting benefits:
Numerous software solutions target the entire or a portion of the procurement process, intending to create savings. Cost savings are possible through the use of P2P, spend analysis, e-procurement, including RFP administration, e-catalogs, and e-auctions.
Perhaps less visible is the domain of supplier relationship management (SRM), where online self-service portals expedite the buyer-seller contact process. Cost savings can be achieved by minimizing human intervention in the onboarding of suppliers, evaluating supplier performance, and addressing day-to-day operational concerns.
The primary goal of category management is to comprehensively categorize and manage each kind of spending throughout the procurement lifecycle. Developing a category management framework demands forethought. When implemented, this technique enables procurement to prioritize their time and avoid wasting money on recurring transactional purchasing.
Total spend on a commodity or service might be leveraged to give key suppliers more volumes or scope. Category-based analysis can help identify cost-cutting possibilities and fast wins.
Savings opportunities are hidden in a decentralized procurement framework. Even if the global procurement organization is center-led, the likelihood of duplication of purchases and maverick expenditure is significant.
Centralizing procurement facilitates the implementation of a consistent global sourcing strategy. Globally using a spend analysis tool, on the other hand, can provide many of the same benefits. A streamlined supplier database results in enhanced supplier competitiveness and lower supply costs.
With the economic situation growing more complicated, businesses have been forced to prioritize cost-cutting strategies in global sourcing rather than just boosting profit margins. However, procurement organizations have significant challenges in cutting procurement expenses, enhancing supplier terms, and lowering product pricing.
They get so focused on finding nickels and dimes that they lose sight of the fact that procurement cost reduction tactics are really about chasing dollars. We have attempted to raise awareness about several tactics that can assist firms in developing a comprehensive strategy for an efficient procurement cost reduction program through this blog.