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11 Cost Reduction Strategies in Procurement

Cost reduction usually refers to cost savings made during a purchasing process, but it is much more than that. It includes savings made through re-negotiation of contract terms and conditions, administrative and operational process improvements, and the intelligent use of data and technology.

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This blog post is a recap of cost reduction actions you can take in the short to long term.

These actions require thought, planning, and possible investment in resources. However, they have the potential to pay off much more in the long term! 

Here are 11 cost reduction strategies:

Short-term initiatives and quick wins

Revisit Current Contract Terms

It’s an acceptable practice to challenge the terms of an existing contract. Any contract not reviewed for more than three years should offer some savings opportunities.

It is likely that some pricing has become uncompetitive and that there is scope for revisiting payment terms. Opening discussions with your suppliers about potential changes to purchasing frequency can lead to volume discounts.

Economic environments change, consumer consumption patterns shift, and technology moves on. Market research and benchmarking provide an opening to discuss pricing with your suppliers.

Challenge Specifications

The first step is to ask the question – do we really need this product or service? Once that is settled, analyze the extent of the need and, on that basis, review the specifications or design.

Product specifications and packaging are often based on supplier proposals or set with one particular supplier or brand in mind.

Requirements based on expected performance or outcome allow for increased competition by a broader range of suppliers. 

Eliminate Maverick Spending

Maverick spending refers to unauthorized purchasing outside agreed contracts. It is also sometimes termed rogue spending or spend leakage.

It can account for a large percentage of all purchases where there is no centralized purchase-to-pay (P2P) procurement process and can be a significant challenge to cost savings initiatives.

Visibility from full spend analysis will highlight this uncontrolled spending and make way for more automated controls. 

Challenge Operational Costs

Proper procurement planning helps reduce costs by ensuring the best use of administrative resources. Poor planning leads to expensive emergency procurement actions and high transport costs.

By streamlining internal P2P processes, whether automated or not, you can reduce transactional costs and additional documentation.

Review Uncompetitive Suppliers

The benchmarking process done when reviewing contracts can highlight other similar suppliers in your database that are not competitive.

These suppliers can be approached to reduce their costs in line with the market or failing that, can be removed by moving that spend to more competitive suppliers.

Active management of strategic suppliers and consolidating the total number of suppliers are critical to maximizing procurement savings. Fewer suppliers to manage leads to a more efficient process.

Use the Data You Have

Clean, complete, and timely data is critical for embarking on any savings initiative.

Reliable information on past purchases and supplier performance can highlight opportunities and drive re-negotiation efforts.

Medium- and Longer-term Initiatives

With short-term wins out of the way, here are some more deliberate strategies that can take more time.

Investigate Outsourcing

Outsourcing is a strategy through which non-core procurement activities or functions are transferred to specialist external providers.

It is especially suited to indirect procurement categories such as facilities management, security, transportation, and logistics. The cost reduction benefits are:

• Lower costs due to the outsource partner’s economies of scale by aggregating customers’ requirements
• Outsourcing low value/high volume purchases free up expensive internal resources
• Access to global expertise and market knowledge in categories where there is little in-house capacity or experience
• Time-consuming negotiations and contracting are managed by specialists

While outsourcing may be a good cost reduction strategy, it still has its downsides. See how onshoring can be used to increase your sustainability in procurement.

Using Technology

There are many software solutions that address all or part of the procurement process with the aim of generating savings.

There are opportunities for cost reduction in implementing P2P, spend analysis, and AI in procurement.

Automation aims to reduce costs by cutting down on human intervention in the process of onboarding suppliers, assessing supplier performance, and managing day-to-day operational issues. 

Implement Category Management

The main objective of category management is to group and manage each type of expenditure holistically, through the entire procurement lifecycle. Implementing a category management structure requires careful planning.

When in place, this strategy allows procurement to focus their time wisely and not waste resources on repetitive transactional buying. Total spend on a commodity or a service can be leveraged to offer larger volumes or scope to key suppliers.

Category-based analysis can highlight cost avoidance opportunities and potential quick wins.  

Centralise Procurement (or Your Procurement Analytics)

In a decentralized procurement structure, the areas of opportunity for savings are not visible. The chance of duplication of purchases and maverick spending is high even if the global procurement organization is center-led.

Centralizing procurement enables a unified global sourcing strategy. However, implementing a spend analysis tool globally can offer many of the same benefits. A rationalized supplier database leads to increased competition among suppliers and reduced supply costs.

Reduce Procurement Risk

Holistic risk management is a broad strategy often managed at the corporate level. The role of risk management within procurement means ensuring that the correct management controls are in place, especially for ad-hoc and emergency purchases.

The dependence on a sole supplier for a critical item or service is one of the biggest risks in procurement and there should always be a mitigation plan in place.

Part of risk management also means focusing on cost avoidance - which is a type of savings. This can be achieved, for example, by limiting the rate of price increases or obtaining more value from existing contracts.

In the current challenging economic environment, every organization is striving to reduce costs. Key suppliers should be developed as valuable partners working with you to keep costs down.

Final Tips

Cost reduction is still a #1 priority for procurement. As we've shown, there are many ways to go about it.

"Soft Savings" like risk management and cost avoidance don't show up on the balance sheet, and can often be neglected in favor of simple cost savings methods: or "hard savings".

To learn how to prove the value of procurement at the strategic level, read our Ultimate Guide to Procurement Cost Savings. It covers both the hard and soft savings methods and everything in between. Plus you'll learn how best to communicate those savings to other stakeholders like Finance.

10 Strategies To Reduce Lead Time & Manage Your Supply Chain

Welcome to part three of our Ultimate Guide to Modern Supply Chain Management. In parts one and two of this blog series we covered how to conduct an internal supply chain audit and how to improve supply chain visibility. Today, we answer an important question that’s top of mind for supply chain managers: How do I reduce lead time across my supply chain?

As manufacturers seek to gain a competitive advantage by improving their logistics and operations, one area they’re focusing on is lead time. Lead time refers to how long it takes to create a finished product, from order placement to final delivery. This is because short lead times contribute to:

• A faster response to customer demand
• Faster time-to-market
• Reduced inventory costs
• Improved cash flow
• More accurate forecasting
• Leaner operations

On the other hand, long lead times can cause:

• A negative impact on customer satisfaction
• Higher inventory costs
• Risk exposure
• Higher transportation costs
• Product development challenges
• Loss of competitive advantage

As a result, reducing lead times and managing your supply chain are key to growth and success. In this article, we’ll go over 10 strategies that can help you gain control over your lead time and provide a better customer experience.

Prioritize Domestic Suppliers

Using domestic suppliers is one of the best ways to quickly reduce your lead time. While there are certainly some items that can only be sourced from international suppliers, there are many raw materials that can come from domestic sources. International suppliers can take as long as two weeks or more to deliver shipments. This means that as you calculate your lead times, you need to add in at least two weeks right from the start.

Pro Tip: Choose Local Suppliers Whenever Possible

The closer your suppliers are to your warehouses, the easier it is to reduce lead time. Even when you prioritize domestic suppliers, you can still face delays if you source materials from across the country. The closer your suppliers are to your production facility, the easier it is to get supplies in a timely manner.

Additionally, consider diversifying your product sourcing by building relationships with multiple suppliers. According to Anvyl research, 71% of brands have multiple suppliers for the same item and 71% are also looking to add more suppliers in the future. Diversifying your supplier base can help reduce supply chain risks, source better pricing, improve product quality, and meet increasing customer demands.

Increase Order Frequency

Another way to reduce manufacturing lead time is to increase how often you order from your suppliers. While it might seem like ordering in bulk saves you money, it’s often not as much of a savings as you think. Instead of large bulk orders, try placing smaller orders more frequently which can help expedite shipments. This helps improve your inventory turnover, which can reduce your carrying costs.

Pro Tip: Perform a Total Cost Analysis

A total cost analysis can help you determine if smaller, more frequent shipments will help your business save money in the long run. No two businesses are identical — some do better with bulk purchase orders, while others benefit more from order fulfillment that comes in smaller batches. Performing a total cost analysis can help you understand the true value of large orders versus small, frequent shipments so that you can choose the method that leads to shorter lead times for your business. You will get efficient and thoughtful service from RE TECH.

Include Suppliers in Your Demand Forecasting Process

Many businesses work on fluctuating schedules, where the order frequency changes from month to month in response to demand. This means that you might know well in advance when you expect a higher volume of orders — and thus, when you’ll require bigger shipments from your suppliers. If you know you’re expecting an increase in demand thanks to demand forecasting, make sure to let your suppliers know in advance.

Pro Tip: Meet With Suppliers Periodically To Share Demand Forecasting Information

Having regular meetings with your suppliers can help you share your demand forecasting information more directly. This is a small courtesy, but a helpful one that can strengthen your partnership with your suppliers and help you both meet fluctuating demand levels throughout the year.

Refine Your Supply Chain Management Strategy

Supply chain management is the management of the flow of goods, services, and products throughout the entire manufacturing process. Many of the tips that help you improve lead time will help your supply chain management as well. A great way to improve lead time is to take a look at the entire supply chain and find areas that can be optimized. Here are just a few ways to optimize your supply chain:

• Draft a legally binding lead time contract with your suppliers outlining their lead times for parts and services. Include penalties for delayed orders, so they will give you realistic delivery times and not try to oversell their delivery expectations.
• Consolidate suppliers whenever you can. When you consolidate, you can leverage your buying power with suppliers, improve your vendor relationships, and focus more time on strengthening your partnerships.
• Focus on strengthening supplier relationships and creating long-lasting bonds.
• Review procedures regularly and iterate on existing processes until lead times are under control and you have data-backed projections for your lead time.

Pro Tip: Utilize Tools Designed To Enhance Supply Chain Management

While the above tips are a great way to begin looking at your supply chain management strategies, it can be a lot to try and handle manually. Digital tools can help you get control over your supply chain and enhance your entire process. Anvyl allows manufacturers to understand their supply chain management strategy and gain a big-picture view of their lead time.

Eliminate Unreliable Suppliers From Your Supply Chain

While it can be hard to sever relations with a supplier, there are times when it’s the best course of action. Unreliable suppliers will quote you incorrect lead times or consistently have late shipments. Not only is this frustrating for your team members and staff, but it also affects your own lead time and communications with your customers. Constantly changing your lead times for customers because of an unreliable supply can damage your brand’s reputation and create more problems in your supply chain management.

Pro Tip: Consider a Supplier Sourcing Solution

If you recognize the need to switch suppliers, using a sourcing solution can help you avoid any inventory deficits and get you back up and running with a new supplier quickly. While the hope is that this doesn’t happen often, using a sourcing solution can streamline the sourcing process when it is time to remove an unreliable supplier from your supply chain.

Insulate Production Processes To Mitigate Unexpected Delays

If you rely on suppliers to complete some of your production processes, you might want to consider bringing those processes in-house. This gives you more control over your production process and avoids any unexpected delays that might pop up when you rely on other companies to complete key parts of your process.

Pro Tip: Bring External Processes In-House To Reduce Expenses

Bringing external processes in-house can result in permanent production lead time reductions while also reducing fees associated with unreliable third parties. When you complete your processes in-house, you don’t have to calculate any shipment time for receiving those materials and can better manage your inventory management system.

However, you might have larger up-front costs to consider. It’s important to calculate the fees that you’ll avoid alongside the additional costs to see what the true time- and money-saving solution is.

Automate Order Entry and Order Processing

Automation helps eliminate the human error that can occur during manual processes. It can help you keep your workflow moving smoothly and create better tracking, data, and reporting metrics — which help you understand your business better and predict more accurate lead times. A great way to get started is to consider the tools you already use, like an ERP system, and see if there are any automation capabilities that you have access to but aren’t utilizing.

Pro Tip: Consider Your Internal Workflows That Can Benefit From Automation

Lead time probably isn’t the only area in your business that could benefit from more automation. Consider your other processes and ask yourself questions like:

• How long does it take to get customer purchase orders into your system?
• How often does the process get held up due to miscommunication?
• How often do orders get lost?

Streamline Internal and External Communication

Another common source of long lead times is miscommunication. Both internal and external communication are key to successful lead time forecasting, and when miscommunication occurs frequently it can slow down your production schedules. Therefore, improving communication improves your lead times.

Pro Tip: Measure Supplier Metrics and Provide Feedback With KPIs

When you can track metrics and provide clear data to suppliers, it helps clear up miscommunication and encourages supplier performance improvement. Tools like Anvyl can help track supplier performance and give you data-driven information.

Identify Bottlenecks, Rework, and Other Inefficiencies

In order to reduce lead times, you need to identify areas of inefficiency in your organization and within your internal processes. This helps you reduce lead times by improving accountability and efficiency. Common types of inefficiencies in the workplace you should be on the lookout for include:

• Bottlenecks
• Machine breakdown
• Rework
• Reorders
• Scrap
• Employee turnover
• Machine changeover

Pro Tip: Use Software To Identify Inefficiencies in Your Supply Chain

Software built for supply chain management can help you notice when there are inefficiencies in your production process. It can also help you notice patterns in the errors that occur on your production lines, which makes it easier to find solutions to the issues that are slowing you down and increasing your lead times.

Work Smarter, Not Harder

It’s important to implement new supply chain management technologies in your organization in order to boost efficiency and decrease lead times. Technology makes it easier to improve processes and manage your supply chain without relying on slow, inefficient, and time-consuming manual processes.

Pro Tip: Use G2 To Compare Solutions

With so many different technology solutions available, it’s important to take a look at what other manufacturers have to say. G2 is a great review site where you can see which digital solutions are benefiting businesses in your industry.