Understanding how an organization can save money in the procurement cycle by increasing efficiency is essential for procurement teams. The cost-cutting or cost-reduction process involves strategizing around the most basic functions of the procurement cycle, such as operational workflows, technology stack, and supplier roster.
Here we’ll explore seven cost-cutting initiatives broken down by short-term cost-cutting hacks and long-term cost-saving strategies.
Short-term cost-cutting hacks
Cost-saving hacks you can quickly implement in the procurement process.
1. Improve visibility
Efficiency and visibility go hand in hand when it comes to cost savings. You’re burning cash if you’re wasting time chasing down individual contracts or missing data to measure procurement KPIs. Instead, create a central repository where relevant departments can save all pertinent documentation related to a particular project. Using a system or shared resource helps avoid duplicative expenses, enables teams to review vendor feedback, and allows for better management of active contacts and project timelines.
2. Increase supplier pool
Don’t fall into the age-old trap of “we’ve always worked with them” or “we’ve always done it this way.” Creating a more extensive and diverse supplier pool can help your company manage shortages or economic downturns. Expanding your supply options will generate a sense of urgency or competition among your existing suppliers that may help you drive down costs. It will also prepare you for last-minute projects or emergencies. Ultimately, the goal should be to create a pool large enough to sustain multiple projects at one time without depleting your roster.
3. Price shop
Inviting more vendors to submit bids or quotes is a great way to ensure you get the best price for your project. Create a Request for Proposal (RFP) or Request for Quote (RFQ) to announce your project, detail your needs and expectations, and solicit bids from qualified vendors. Sharing your RFx on platforms like Fairmarkit ensures your project gets plenty of visibility so you can efficiently source suppliers and compare prices.
4. Pay attention to delivery times
Time is money, and a project delivered on time is the most profitable! When awarding vendors, it’s best to steer clear of those with long delivery times. Why? Because that will impact your total lead time. Missing one piece of critical equipment could bottleneck your project or stall it entirely. If you can’t avoid long delivery times, incorporate that into your planning process by identifying those items early in your project and baking them into your estimated delivery date.
Long-term cost-cutting strategies
These initiatives may require more long-term strategic planning and collaboration across multiple departments.
5. Go digital
Digital transformation is more than just a corporate buzzword; it’s saving companies some serious cash. According to The Hackett Group, most procurement teams can use technology to reduce process costs by nearly 30%. On average, companies that go all-in on digitalizing their supply chains can boost their annual EBITA by 3.2%, says research from McKinsey & Co.
6. Automate processes
Sourcing is an excellent example of where technology can play a significant role. Increase the speed and efficiency of your buying team by automating repetitive and time-consuming tasks. Autonomous sourcing uses AI functionality to bundle events, communicate with vendors, and support decision-making. You can significantly impact your bottom line by streamlining your sourcing efforts to reduce cycle times.
7. Get a handle on tail spend
Tail spend comprises small and infrequent purchases that remain uncategorized or unmanaged by procurement. On the surface level, that seems fine, but when you look closely, nearly 20% of a company’s overall spending is considered tail spend. Using technology, data, and strategy, your company can see significant cost savings by managing your uncategorized spend. We suggest using the crawl, walk, run approach to demystify your tail spend.
Cost-cutting for procurement teams boils down to one word: efficiency. You should explore short-term and long-term ways to make your team more efficient to realize sustainable cost savings. This will help you achieve quick wins for cost-cutting and set the foundation for long-term infrastructure and technology initiatives that will impact your bottom line.