One of the most important factors that can impact a company’s profitability is its procurement costs. To reduce costs, improve supplier management, and increase profitability, a plan is required for procurement savings. There are many procurement savings ideas that can be implemented. Some are simple, while others require more time and effort. There are 16 ways to reduce procurement costs, depending on the size of your business.
1. Request supplier discounts
Ask for a supplier discount to reduce procurement costs
One of the best ways you can reduce your procurement costs is to ask suppliers for discounts. In return for an early payment or increased order quantities, you can negotiate with suppliers. If the supplier supplies your materials in large quantities, a small discount can result in significant net savings.
A long-lasting relationship with suppliers will give you greater bargaining power and help you win your negotiations. A blanket order is one of the best ways to reduce supplier costs if you have a reliable supplier. This contract allows you to purchase goods or services at a fixed price from a supplier for a specific time period.
2. Check contracts to prevent spending leakage
To avoid any procurement spending leakage, review the contract
Leakage of funds can occur outside of contract terms. To ensure that all purchases are in compliance with the contract terms, including payment terms, you should keep an eye on them. Spending leakage can be caused by non-compliance purchases. You should identify them quickly and seek out solutions to avoid this in the future.
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The cost of a leakage that goes unnoticed will continue to mount and eventually lead to a large expense. You can prevent money loss by reviewing contract terms and supervising your purchasing activities.
3. Consolidate your spending
Spend more on a select few suppliers to consolidate your spending
Consolidating your spending with a few suppliers is a better option than buying from many suppliers. You can get a discount by purchasing more products from one supplier.
You should also keep some other suppliers in your contact list in case of problems with the main supplier or inability to deliver goods and services on time. This will be discussed in the next tip.
4. Reexamine your purchasing needs
Before you buy, review your purchasing requirements
Be sure to evaluate your warehouse before you decide to buy anything. You should think about what to do with any unused products. Overstocked inventory is considered “dead money” and can be costly to store. It is also at risk of becoming damaged or obsolete.
You should only buy what you actually need for both direct and indirect materials. This will help you reduce inventory costs and storage expenses. Next time you place an order, make sure to review your stock levels.
5. Avoid maverick spending
To reduce your purchasing costs, avoid maverick spending
Maverick spending can be created without following procurement policy by either unauthorized individuals or non-preferred suppliers. This is an inefficient source for procurement and must be addressed. One of the best ways to save money on procurement is to reduce maverick spending.
You need a strong procurement policy that is followed by everyone. You must pay attention to who can make purchases. This will ensure that everyone in procurement knows what their role is and how to best accomplish it.
6. Analyze the product’s life cycle
Analyze the product’s life cycle
Quality should not be sacrificed for cost. You need to take into consideration durability and longevity. You can save money by purchasing a product that is slightly more expensive, but saves you a lot of time and effort in repairing or replacing it.
However, if you are only going to be using them for a short time, then you might not need the highest quality products. Depending on the purpose of use, middle-range products may be more cost-effective.
7. Review suppliers regularly
Review your suppliers regularly
Plan to regularly evaluate suppliers, such as an annual or biannual assessment. You can evaluate their performance and see if they are delivering products on time, at a fair price, and with satisfactory quality. You can add or remove suppliers who don’t live up to your expectations, and you will gradually build a list that matches your needs and optimizes your spending.
8. Vendors can use self-service portals
Vendors can use self-service portals
You can create a portal that allows vendors to view their transactions and manage their accounts. This saves time and money, while ensuring that deliveries meet all requirements. Large corporations can use this method to cut down on supplier management costs, especially if they have many vendors.
9. Utilize procurement KPIs
To find cost-saving opportunities, use procurement KPIs
You need to establish clear procurement KPIs in order to spot potential improvement opportunities in your procurement. Also, monitor the progress of these KPIs closely. You will have a better idea of how your procurement performance is performing.
Many KPIs can give valuable insight, such as the tracking of emergency purchases or the ROI of procurement activities.
It is important to establish KPIs and monitor progress in order to assess the efficiency of your department and highlight areas that are lacking. This method can help you save money if it is done correctly.
10. Establish clear procurement policies
Establish clear procurement policies
To reduce procurement costs, it is important to establish clear guidelines for procurement. It will be easy for everyone to access the framework and follow it. This will allow you to eliminate unnecessary purchases and streamline your supply chain.
You should also evaluate your procurement processes to determine if they are aligned with your business strategy and budget. You can also review your procurement process every year to determine if there are any areas that need improvement.
11. Reexamine your replacement strategies
Reexamine your replacement strategies
Your bottom line can be affected by how you plan to replace parts. Routine replacement is not applicable to all components. To ensure that the machine works properly, it is important to replace critical machine parts regularly. Consumables, however, can be replaced if necessary.
Remember to also account for the lead time and cost of waiting for a replacement. It is not a good idea to interrupt your supply chain just to wait for a minor substitute.
12. Improve risk management
Improve risk management
You can reduce or eliminate risks associated with procurement risk management. A complete plan that anticipates and addresses risks will help you better handle unplanned events and avoid costly surprises.
Supplier dependence is one of the biggest risks for organizations. You should always have alternative suppliers in case of force majeure, which could cause the supplier to be unable or unwilling to deliver goods on schedule. You shouldn’t depend too heavily on one supplier. To avoid logistical problems, be sure to review contract terms and to follow up with vendors.
13. Centralize and collect data
Centralize and collect data
The first step in understanding your business’ performance is to collect accurate data. Connecting all data from sales, procurement, inventor and inventory will provide you with a complete picture about key metrics such as inventory turnover ratio, inventory cost, lead times, etc.
You can gain insight from a central database about which items you should buy more often, how frequently you should order them, and whether inventory and sales are in line. It also gives you the ability to determine whether you should switch suppliers. It gives you real-time reports and helps you find cost reduction strategies in procurement.
14. Automate the procurement process
Automate the procurement process
Manual processing can cause delays and increase costs. Automating repetitive tasks can lower labor costs and allow your team to concentrate on more important tasks. You can also avoid costly mistakes by automating manual data entry and invoice processing. Although it is necessary to start an automation system, the investment will pay off over the long-term and help you save time and money on manual tasks.
15. Integrate procurement systems
Integrate procurement systems
It is not possible to automate parts of the procurement process until all the systems are integrated, including the accounting system and purchasing system. The entire process can be connected to ensure it runs smoothly from beginning to end. This not only reduces labor costs, but also prevents mistakes. The entire supply chain is integrated and allows you to manage your business activities with ease.
16. Training your staff is a great way to save money and make it a team effort
Not only is procurement an issue, but so too is organization. To ensure that everyone is on the same page, educate your employees about the best procurement savings ideas. This involves a collective effort to reduce spending. Your team should have a focus on purchasing cost savings and use the best practices to maximize costs.
How to lower procurement costs for Magento businesses
Magento businesses can reduce procurement costs
Magestore offers a complete solution to cost reduction for purchasing Magento-based companies: PWA Magento Purchase order. This platform allows you to manage all steps of procurement, streamline PO management, automate your process and effectively monitor your suppliers’ performance.
Our PWA Purchase Order allows you to centralize all data and gain real-time visibility across multiple systems. This is possible by syncing data between suppliers, products and inventory for analysis. This will allow you to monitor and build a long-term relationship and establish a good stock flow.
Our software also frees you from tedious manual tasks and provides you with more insight into how to buy and sell better. Now you can quickly prepare POs and track the execution of POs for product delivery. The procurement process can be simplified for many reasons. It saves time and money, while also ensuring that you have the right products at all times at the right price.
Magestore offers a free consultation to help you improve your procurement.
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