Procurement Savings - 15 tips to increase your profits
The key to a successful business is an effective supply chain management process. To ensure high profits, procurement savings need to be a priority.
Something most people don’t realize is that a 10% decrease in expenses means more than 10% increase in revenue.
How’s that? It’s just simple math:
Consider your Turn Over is 100 and for each $1 you only spend $0.8. Your total expense is 80, which means your profit is 20.
A 10% increase in revenue means your Turn Over is 110, your expense is 88, so your total profit is 22.
A 10% decrease in cost means it only takes $0.72 to produce $1. Therefore for each $100, you will only spend $72, which means $28 profit.
Now, how can you ensure procurement savings? Here are 15 methods:
15 methods to ensure procurement savings
1. Ask your suppliers for discounts
Often, you can make procurement savings by changing your purchasing patterns. Discuss with your suppliers whether they would be open to offer you a higher discount if you increase your order volume slightly.
2. Avoid Maverick spend
Maverick spending, also known as tail spend, or rogue spending, can account for up to 80% of purchases made in an organization that lacks a centralized purchase-to-pay procurement process.
So look through spend records to find any uncontrolled spending, then assign them to your preferred suppliers and go over your process with your team. This will prevent Maverick spending from happening again.
3. Avoid spending leakage
Spend leakage occurs when spending happens outside the terms of the contract. You should monitor all purchases for compliance with contract terms, including payment terms. If any non-compliant purchases that cause spend leakage are made, you should put controls in place to prevent them from happening again.
4. Review your purchasing requirements
Make sure you only purchase what is necessary. This will help you cut down on excess costs, as well as storage costs.
5. Make sure products are ordered by the right stakeholders
Procurement savings can also be made by cutting down incorrect purchasing. So make sure the right people are ordering the right products.
6. Make savings a team effort
Having the right stakeholders draw up purchase orders doesn’t always ensure the right products are purchased (cost-wise). So make sure everyone is on the same page and encourage the team to save money whenever possible.
7. Review your stock levels
Another way you can ensure procurement savings is by cutting down storage costs. Stocks not only cost you money to deposit, but they can also deteriorate in time, sometimes becoming unusable. So before you place another order, first review your stock levels and try to use what you already have.
8. Centralize storage
Storage costs can be cut down even further by centralizing your warehousing. This will help you save money on both real estate and staff.
9. Review products’ specifications
Clearly, buying cheaper products will help you save money. But you don’t have to compromise on quality. If two products have the same specs, but different price points, there’s no reason not to go for the cheaper one.
Of course, things like durability and life-span need to be considered as well. If a product is slightly more expensive but requires fewer repairs, you could save money that way.
10. Review your replacement strategies
Routine replacement can have a negative effect on your bottom line. So only renew items when necessary. And make sure you factor in the cost of waiting for a replacement as well.
For example, machine parts should be replaced regularly to prevent failure, but consumables can be replaced only when needed.
11. Only purchase from agreed catalogs
Duplication is both expensive and unnecessary. Larger orders from one supplier lead to better discounts. So try to only purchase one type of product or more from the same supplier.
12. Link purchasing to inventory and accounting
Linking your purchasing system to your inventory and accounting systems will not only help you cut down staffing costs, but will also help you prevent mistakes.
13. Reduce internal costs
Staffing costs can be cut down further by streamlining processes to reduce operational costs. With improved visibility into overall spending and data accuracy, it’s easier to reduce transaction costs and failure costs.
14. Improve risk management
Supplier dependence is one of the biggest risks an organization could face. One way to manage risk is to ensure your procurement process doesn’t depend too much on a major supplier. This includes paying close attention to contracts, following up with suppliers, and taking action to avoid logistical issues.
Part of risk management also means focusing on cost avoidance. Procurement savings can be made by focusing on ways to reduce the rate of cost increases or negotiating contracts with value-added services (such as extended warranties or free shipping).
15. Use e-procurement software
Reverse auctions are a great way to drive down costs and improve terms.
A streamlined procurement process is crucial to a profitable organization. There are many ways to make procurement savings, but all staff and managers should be aware of them and ready to acquire the best skills and knowledge.