Strategic Procurement: Unlocking Cost Savings and Efficiency for Your Business

It may be argued that a business can only provide the best value to its customers when it procures the best value. This is why a business must continually find ways to optimise its expenditure if it wants to get ahead by offering clients a better option than its competitors.

Procurement has always been a key focus area for businesses looking for ways to be more cost efficient, with strategic procurement placing particular emphasis on finding suppliers able to maximise the value of procured goods and services.

While cost efficiency is by no means the only consideration when selecting suppliers, it does factor heavily into an overall procurement strategy which in turn has a major role to play in determining overall profitability. This necessitates close collaboration between procurement and other teams such as logistics, finance and operations.

Not having a solid strategic procurement policy in place could literally cost a company dearly, not only because of unnecessary spending but also because of lost opportunities for innovation and overtaking the competition.

Understanding the Impact of Procurement on Costs

A cursory look at direct and indirect cost components will quickly show just how much procurement can affect an organisation’s profitability. Very simply, direct costs go into manufacturing or producing what a company offers to its customers, while indirect costs go into the company’s internal operations.

A business that spends more (or less) than it has to on the products its sells, or on paying the people who put those products together will inevitably find it difficult to compete.

Strategic procurement is how a business zeroes in on potential cost reduction, typically in the following aspects of the procurement process:

• Adjusting order quantities and terms of delivery
• Altering materials or components
• Considering bundled volume or contracts
• Eliminating unnecessary steps in the supply chain
• Evaluating in-house or outsourced options
• Finding new suppliers or partners in other locations
• Inviting potential suppliers to bids or tenders
• Managing inventory more efficiently
• Negotiating prices and contract extensions
• Partnering with suppliers on mutually beneficial projects
• Reducing or eliminating unnecessary purchases
• Standardising and maximising specifications

Effective cost management in procurement has several long-term benefits for a company which include improved productivity, credit rating and debt management. A company will also have more resources for team compensation, marketing and other business aspects and processes.

Developing a Cost-Conscious Procurement Strategy

While the way procurement affects a business’ overall profitability is readily seen, ways for aligning procurement objectives with overall cost reduction goals are not always immediately apparent. 

Because many procurement teams have a tendency to work independently of other teams and use their own terminology, their priorities end up being different from the rest of the company. 

Procurement’s cost-cutting measures, for instance, may not exactly line up with how the company is looking to save on technology or talent acquisition. This, again, emphasises the need for procurement to work closely with other teams and understand each team’s specific objectives and motivations.

This understanding should inform the procurement team’s cost optimisation efforts as it conducts market research and supplier evaluations, the latter using such criteria as:

• Adaptability
• Cost
• Finances
• Location
• Management Style
• Performance
• Quality
• Services
• Sustainability
• Technical Ability
• Timeliness

The procurement team must also take a closer look at the value provided by a potential supplier while taking the Total Cost of Ownership or TCO into consideration. TCO factors in costs other than price to determine the value of an entire life cycle of a procured product or service, and to enable decisions that ultimately align with the cost reduction priorities of the company as a whole.

Leveraging Negotiation Power

The outcome of any negotiation between a potential supplier and the procurement team is founded on the way both parties approach the negotiating table. There is no denying that one party, at a fundamental level, is bent on selling their products or services to the other, who is just as determined to get the best possible deal. 

The reality, however, is that both parties know that they stand to benefit from establishing a strong relationship with each other that goes beyond the ongoing negotiation. The supplier would love to have a loyal, repeat customer, and procurement would equally love to have a partner whom they can rely on for the quality products and services their organisation needs.

If the potential supplier takes the time to understand how the procurement team’s objectives go beyond cost reduction, they can show the team that they are a partner that can be trusted. For their part, the procurement team needs to be willing to communicate their objectives to the potential supplier so that the latter knows exactly what the team is looking for. 

Communicating these objectives to potential suppliers thus paves a smoother way to the negotiation proper, where the following strategies may be used to drive cost savings:

• Identifying contract terms that might be adjusted in terms of value rather than price
• Leveraging volume discounts, rebates and other contractual incentives
• Asking after interest-free payment options or staggered payments for major purchases
• Taking a closer look at add-on services such as expedited shipping that may not really add value 

It is also recommended to conduct an outlier analysis before the negotiations which will clarify how much is currently being spent on procured products and services, and compare it with how much should be spent on them per year.

Supplier Consolidation and Strategic Partnerships

Building the strong supplier relationships mentioned above enables the procurement team to consolidate or limit the number of suppliers it works with. 

Consolidation has several advantages for a business which include more opportunities for leveraging volume discounts and shorter, more streamlined processing. It also results in more secure transactions and better supplier performance. 

Establishing not just strong but strategic partnerships with suppliers can be done by:

• Knowing what makes certain suppliers strategic in the first place
• Making sure these suppliers understand their strategic value to the procurement team
• Being clear on the objectives of the procurement team and the partnership
• Keeping communication transparent and being open to feedback
• Getting to know the supplier better and finding ways to strengthen the relationship
• Making sure that the overall objectives of the organisation are also being met

Some organisations invest in their suppliers, which enables these suppliers to provide the organisations better products and services. This is one among many cost-optimising vendor management strategies which include conducting regular due diligence on suppliers and having negotiation experts on the procurement team.

Embracing Technology for Cost Efficiency

Technology solutions for streamlining procurement processes abound, and it is up to a business to choose which software and e-sourcing tools best suit their needs. In general, these solutions automate workflows to reduce manual effort and errors, and leverage data analytics for spend visibility and identifying cost-saving opportunities.

The legacy systems of larger, long-established organisations may cause their procurement teams to hesitate before adopting newer solutions. Many of these new platforms, however, are either easy to integrate or come with onboarding, migration and training services to make the transition easier. Platforms are also generally able to scale according to business growth.

In particular, present-day procurement technology solutions can help with many key processes such as:

• Alerting relevant team members during transactions
• Automating contracts, invoicing, requisitions, RFx’s and purchase orders
• Centralising, cleaning and validating data
• Centralising all procurement-related office communications
• Connecting separate systems being used by an organisation for processes such as ERPs,  project management and accounting
• Customising and deploying procurement functionalities with low or no-code interfaces
• Facilitating quick turnaround times for tickets
• Facilitating approval to ensuring timely purchases and payments
• Providing custom management support across teams in different locations
• Providing visibility and real-time reporting for processes such as spend management and analysis, requisitions, payments and sourcing
• Managing suppliers and contracts as well as tracking savings
• Merging upstream and downstream sourcing and procurement 

Implementing Efficient Procurement Processes

The work of implementing tech-driven and other measures to streamline procurement workflows and eliminate inefficiencies begins with a list of what needs to be procured, and outlining the process for procuring it. After making that list, the procurement process may be very broadly outlined as follows:

• Supplier evaluation and selection
• Contract negotiation
• Purchase order finalisation
• Invoice and payment processing
• Order delivery and audit
• Invoice filing and tracking

The efficiency of this entire process may be enhanced simply by maintaining the strong, strategic supplier relationships and using the technology mentioned in previous sections. 

Other ways to enhance efficiency include improving negotiation skills, staying on top of compliance requirements, and providing transparency that enables suppliers and other partners to know what is going on during the procurement process.

Inventory management can also be optimised to reduce carrying costs and increase overall efficiency, and this begins with having a solid warehouse management system in place. Just in Time or JIT strategies can likewise be used to minimise inventory holding expenses because of how they enable procurement on an ad hoc basis.

Monitoring and Controlling Costs

On top of facilitating data analysis and improving team performance, establishing key performance indicators or KPIs for tracking procurement costs enables a business to find and eliminate anything that slows down the procurement process. These KPIs include:

• Compliance Rate
• Emergency Purchase Ratio
• Lead Time
• Maverick Spend (Purchases not covered by the procurement policy)
• Procurement Cost KPIs (Avoidance and Reduction)
• Procurement ROI
• Purchase KPIs (Budget and Time)
• Purchase Order KPIs (Cost, Order Coverage and Cycle Time, Price Variance)
• Spend Under Management
• Supplier KPIs (Number, Availability, Defect Rate, Quality Rating)
• Vendor KPIs (Costs and Rejection Rate)

Aside from tracking these KPIs, businesses need to conduct regular cost reviews and analysis so that procurement processes can be continually improved. The procurement team will then be able to put cost control measures in place to help with managing expenses such as looking for spending leaks and consolidating spending.

Note that the procurement team may also need additional training to implement these new measures, and to reinforce the concept that cost control has to be a collective effort.

Risk Management and Mitigation

When costs are not controlled and the procurement process itself is not properly managed, the cumulative losses that a company sustains as a result can be significant enough to shut it down. It therefore becomes crucial for a company to identify potential procurement risks and mitigate them with improved management.

These risks include those that are long-term or strategic, i.e. related to procurement strategy or supplier selection. Operational risks have to do with running the company daily such as quality issues or cost overruns. Other procurement risks include financial, legal, technical and environmental, as well as those related to the company’s brand image or reputation, as well as to the suppliers.

This is why it is recommended to incorporate risk assessment into the supplier selection process as well as into contract management. The assessment process involves risk identification and analysis, which in turn involves gauging the level of risk. 
Then, contingency plans can be prepared for mitigating the risk and minimising cost disruptions, with the plans assigning point persons for specific scenarios. The entire process should be logged so that these plans can be updated or added to as needed.

Continuous Improvement and Benchmarking

Teams in any discipline invariably turn to industry standards for help in evaluating their performance, but benchmarking in procurement is a challenge not just because of the differences between industries, but because of the lack of uniform terminology. What is “procurement” to one business, for instance, may be “sourcing” or “acquisition” to another. 

This difficulty has been met by the American Productivity & Quality Center or APQC, which uses “procurement” and “sourcing and procurement” in establishing a set of benchmarks which organisations can choose from to assess their procurement performance. Among the most popular APQC procurement benchmarks are:

• Purchase Order (Cycle time in hours)
• Average Lead Time for Suppliers (Materials Purchased in days)
• Average Procure-to-Pay (Cycle time in days)
• Full-Time Equivalent Employees or FTEs (Number that manages suppliers in per cent of procurement FTEs, and per purchase worth $1 billion)

In addition to using these benchmarks, procurement teams should, again, work with other teams to identify cost-saving opportunities, particularly those in logistics, finance, planning and manufacturing. Their cooperation will be invaluable in fostering a culture of continuous improvement in procurement processes. 

XI. Case Studies: Success Stories in Procurement Cost Optimisation

A smooth and fully optimised procurement process is the dream of every procurement team, a dream that seems increasingly unattainable in businesses of increasing size and complexity. As an enterprise continues to grow, so do its procurement-related issues. Yet, as these companies show, careful planning and management can enable procurement to succeed at cost optimisation.

Starbucks has 32,660 stores worldwide which need to procure coffee beans of the highest quality for its customers. The coffee company faced formidable procurement challenges such as overspending on third party logistics and deliveries that were late more than 50 per cent of the time. As the company continued to grow, its procurement process also became needlessly complicated.

To address this, Starbucks focused on lessening the cost to serve by restructuring its supply chain and preparing it for future growth. Today, Starbucks has a robust procurement process in place that optimises costs by using automation technology to facilitate its operations, manage inventory, and keep tabs on every shipment.

Nestle had 150,000 suppliers at one point, prompting the largest food & beverage company in the world to kickstart the massive task of boosting the efficiency of its procurement process. The streamlining process included reducing the number of suppliers as well as consolidation efforts which contributed 65 per cent of the company’s total procurement savings of USD 1 billion in 2019.

ANZ worked with Greater Group on rolling out its first ever portable pop-up branch in which procurement played a key role in cost optimisation. In charge of end-to-end production of the branch, Greater Group worked on improving CAPEX and OPEX investment as one of the project goals, and cost-efficiency as one of the project benefits.

This involved the procurement of materials that would hold to the specifications of being light yet sturdy enough to withstand packing and transport at speed. The finished temporary branch format was so successful, it prompted orders for five more kiosks, the first of which reported more than 80 per cent of the customer interactions typically handled by a full branch.

Procurement as a Strategic Way to Save

Being able to get the best value for every expenditure is the goal of strategic procurement, which enables a business to provide the best products or services for its customers and remain profitable. This very nature of strategic procurement is what enables it, in turn, to open up numerous cost-saving opportunities for the business.

These opportunities include conducting market research and supplier evaluations, considering TCO, establishing strong supplier relationships, consolidating suppliers, and forming strategic partnerships. Other effective procurement practices involve the use of technology to streamline processes, using the right KPIs to track performance, and putting risk management plans in place.

Even the largest organisations with highly complex procurement processes have been able to implement strategic procurement to generate significant savings. While it will take a serious commitment involving multiple stakeholders, strategic procurement can quite literally pay off in the long run, and getting started today will lay the groundwork for continuous savings to come.

Greater Group is a multi-disciplinary global retail design agency. We have been creating award-winning retail spaces, customer experiences and workplaces since 1989, utilising our combined expertise to deliver high-impact, high-return design, fit-out and manufacturing solutions and provide clients with one point of contact throughout.

Contact us at contact@thegreatergroup.com to discuss how we can elevate your brand through innovative, future-proof retail design solutions.