How to Strategically Optimise Procurement Costs?

The best way for a business to realise a profit is to reduce business costs. Cost efficiency refers to how the company operates to reduce overall operational costs while minimising financial leaks and resource utilisation. Automation of business operations is a proven way to enable cost efficiency in business operations. Enterprises face pressure from multiple areas such as price erosion, pandemic lockdowns, and international trading policies. So, how does a business continue to thrive amid all this chaos? The key lies in the procurement organisation, which can help your company to capture value.   

Corporate Cost-Efficiency Depends On Procurement Culture

McKinsey’s study shows that investing resources and time in capability building has a 99% correlation with better procurement health. In addition to that, companies with good procurement health were able to increase their cost savings by two times. The short-term initiatives boost the profit for the current quarter, while long-term strategies build supply chain resilience.

The core objective of procurement principles is to achieve more value for the same money. However, the solution is not straightforward. Multiple factors must be balanced to meet the end-user requirements in the best possible way. Certain factors dominate the procurement strategy for certain supplies at any given point in time. The overall goal should be to reduce total ownership cost irrespective of the purchase price.

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How To Achieve Procurement Efficiency?

Corporate companies must take measures to increase procurement efficiency in order to realise economic benefits. Changing enterprise-wide procurement policy is not a single-step process. Instead, it is an evolving strategy that must be continuously monitored and updated based on real-time results and benefits. Here are some things you can do to ensure that your company is on track:

• Equip the team with practical, insurance, legal, and procurement experience
• Understand project objectives clearly to benefit end-users and reallocate procurement resources accordingly
• Update the contract to include clauses based on cost-benefit analysis to stop overwhelming suppliers
• Include risk management guidelines at every stage of the procurement process
• Streamline compliance process to assure product quality
• Encourage innovation from all stakeholders by evaluating and adopting procurement frameworks

Cost reduction in procurement doesn’t necessarily mean cost-cutting. The cost reduction strategies help uplift the organisation through strategic measures that prove beneficial in the long run.

How Is Integrated Procurement Solution Useful For Cost Optimisation?

The purchase price of the item alone should not be considered the procurement cost. While negotiating with suppliers, overall product value should be considered for cost optimisation. Generally, procurement costs can be categorised broadly into five different types of costs:

1. Base cost: Price per item as quoted by the supplier
2. Transportation cost: Better negotiations with carriers are essential to reduce shipping costs
3. Closing cost: Different fees and commissions are additional expenses that can add to the procurement cost
4. Taxes and duties: Depending on the source of supplies, your organisation may have to pay taxes, tariffs, and duties to procure supplies
5. Negotiation costs Indirect labour costs for researching potential suppliers and travel expenses to meet with suppliers are considered negotiation costs

It is widely acknowledged that 65% to 75% of business expenses have something to do with procurement. For cost optimisation, your business should focus on different types of savings:

1. Historic savings: refer to the change in the unit price compared to the previous year

2. Budget savings: refer to the difference between the planned budget and the actual price

3. Technical savings: refer to the change in price due to variations in technical specifications

4. RFP savings: refer to savings realised while selecting a supplier

5. Index savings: refer to cost savings due to changes in the market value

6. Ratio savings: refer to a combination of different types of savings

Does your business take every measure to realise all the above-mentioned types of savings? If not, it is time to adopt a procurement system that provides a unified interface for the procurement team to collaborate with all the stakeholders for cost optimisation.

E-procurement can help you to create a cost-efficient procurement process in the following ways:

* Strategic spend control The first step to controlling expenses is to view and analyse the costs. The procurement software makes the procurement process transparent for all stakeholders, enabling procurement leaders to have a complete view of all types of procurement spending. The platform is a unified interface to view different types of organisational expenditures. AI-powered software provides data analytics in a visual format for easier interpretation.

* Eliminating maverick spend ‘Maverick spend’ refers to spending for supplies outside of the procurement process. Does your organisation purchase off-contract frequently because it is not justifiable to spend time and effort creating purchase orders for small-ticket items? This type of maverick spending can become too much for the organisation to handle in optimisation efforts. A procurement solution will simplify the creation of purchase orders, and all stakeholders can determine the threshold for purchase orders to eliminate maverick spends.

* Modernising invoices

Invoicing and accounts payable processing is time-consuming when done in traditional ways. Many suppliers will be willing to provide discounts if invoices are paid on time. E-procurement simplifies invoicing and accounts payable and can be customised to your organisation. Automated invoicing and automated workflows will significantly help in increased cost savings.

* Improving collaboration

Often, the core reason for delayed procurement is a lack of communication and collaboration. An automated procurement system enables collaboration between multiple departments, thus reducing procurement time drastically. This also helps in procurement and cost optimisation.

Conclusion

Procol is an all-inclusive procurement solution that enables automation, improves visibility, enhances collaboration, and increases the cost efficiency of business operations. Contact us to schedule a demo to learn how your enterprise can control procurement costs and source suppliers effectively with automated procurement workflows.