cost saving in procurement

3 Alternative ways to cost savings in procurement

Reducing costs that will have instant and lasting effects is crucial during these uncertain COVID-19 times of crisis where sales and turnover are under pressure in many companies. Even if your business is not suffering during this crisis you still can look for more opportunities to create greater cost savings, as you will have more levers to offer suppliers to gain reductions in return.

Often working with existing suppliers is a much faster route in creating real and lasting cost reductions, because you already know the suppliers who are fully implemented, and the suppliers already know your business. 

Understand that if you were to follow the traditional route to cost savings, you would make a tender, negotiate, select a new supplier, implement and then maybe realize cost savings.  

In most cases, the problem with this approach is that it takes time and significant resources (costs) to do this exercise.  

There is a significant time lag on cost-saving, as it is not realized until the supplier is fully implemented, which requires considerable time and costs. In addition, there is a real risk of hurting the relationship with existing and good suppliers when you run tenders, which is why they should be carefully considered before executing. 

We present concrete suggestions to how companies can remove costs effectively via initiatives towards existing suppliers without running any tenders or RFQ processes.  

It is often a far easier and faster approach than having to replace existing suppliers, as the new suppliers need to be implemented fully before real cost savings can be generated. 

1. Remove costs you don’t need

Your first step should be to remove costs that you do not actually need. In most larger companies there is a great lack of transparency between the people who actually approve and pay for products and services (your external costs), and the people who actually use and utilize the associated product or service. Therefore, you should identify these products and services not being used or utilized. This can be done in different ways for different types of spend. Below we present a few different approaches you can utilize to identify these products and services:

Example – IT Spend: For IT spend you should identify the specific services or modules that are not really being used. You can do this by making a long list of all the IT solutions per service / module being bought by your company. Making this list can be a challenge, but the CIO and function leaders should be able to give their input to it. Another way could be to go through the invoices for ‘IT’ or ‘Software’ spend. When you have the list of IT providers you should identify how many logins, page views or similar measures have been completed during the last e.g. 3 months. Based on this analysis it should be easy to identify which IT-services could be potentially terminated. However, please understand there can be critical data stored on a service even though there is no activity, so make that sense check before you terminate the contract.

Example – Direct spend: For direct spend categories you typically build up stocks of the products/raw materials that suppliers supply. You need to measure your stock turn split down per supplier and per product. You do this by using this formula: Stock turn = (Yearly usage measured in cost value) / (Stock value in cost prices). Rank all suppliers and products in according to stock turn. For each of the suppliers and the product with the lowest stock turns you need to make the following evaluation:

  • Can the business function properly without this product or supplier?
  • Can we stop buying this product or from this supplier?

If the answer is ‘Yes’ to these questions, block the product (or supplier) from being open for purchase in your buying system.

This is a ‘healthy’ exercise that can reveal a great number of products and services that are not needed, and hereby you can reduce costs without affecting the business.

2. Offer Top 20-30 suppliers help in return for helping you in cost saving

By focusing on your top 20-30 suppliers you probably cover +60% of your total spend and therefore a large share of your total cost reduction potential.  

Invite all these top suppliers to an (online) business review meeting and ask them to bring their relevant representatives, and not only the key account. You need in the meeting people that can make decisions in relation to the topics you want to bring to the discussion. 

Inform suppliers about the situation as you see it and inform them in a polite and respectful manner that you need to explore opportunities regarding reducing your costs towards them. 

Also inform them that you want to bring something to the table and offer the supplier help in any way you can, except for cost increases. The last comment is very important! 

Even in these tough times you or your company probably have something non-financial to offer the suppliers that is of a great value to them. Maybe you have not realized you have this, so be creative here and spend some time making a ”catalogue” of initiatives you could take to help the supplier. 

For each supplier prepare which of your “offers” you want to try and sell and prepare your arguments. If the suppliers themselves do not have any suggestions to what they would like from you, then present your catalogue.  

Then initiate the discussion with the supplier and be open, honest and creative. 

By doing so, new solutions might open where you can help each other, and you can reduce cost instantly with existing suppliers and improve your relationship with suppliers.

3. Reduce non-conformance costs

Non-conformance costs are the costs arising from the suppliers not delivering in accordance with the expected quality, quantity or time.  

To reduce these costs you should start tracking supplier non-conformance experienced by the people in your company receiving and using the goods or services delivered by your suppliers. This is easier to implement thank you think.

Find out more ways for cost saving in procurement 

There are many ways to reduce costs without any use of tenders and RFQs. This article has provided you with a range of ideas on how this could be done in your business. Using the approaches outlined here combined with your understanding of your own business and creative thinking can generate great cost reductions that will be instant and lasting. 

cost saving in procurement