8 Strategic Levers to Reduce Procurement Costs
Last updated Apr 3, 2022 - 3 min read
- Table of Content
Selecting and implementing procurement measures is a vital part of a holistic approach to strategic procurement.
Working continuously, systematically and fact-based with your procurement costs is crucial to realize savings and improve profitability.
Identifying the Cost Drivers
In order to implement procurement measures, it's important to understand the underlying cost drivers. The following method may be appropriate for analyzing cost drivers, where total cost is a function of:
The activities we do, the productivity we execute the activities with, as well as the unit costs of the goods and services included in these activities.
Note that the measures, or levers, can affect several cost drivers simultaneously, due to linkages and interrelationships. For example, a tender process can result in lower unit prices, as well as product standardization based on input from suppliers during the process.
Levers to Reduce Procurement Costs
The eight levers are divided into two groups; commercial and process. Below we have listed some typical characteristics and key assessment factors for the various measures.
- Negotiate better terms with current suppliers, focusing on lower prices
- Consider contract extensions to achieve lower prices
Learn more about negotiation as a strategic procurement lever.
2. Tender process
- Invite suppliers to submit a bid to supply products or services (RFx)
- Specify requirements in cooperation with users
- Introduce new suppliers and expand supplier base geographically
- Consider larger order volumes, different delivery terms and contract lengths
- Bundle contracts: Secure standardized terms with the same supplier throughout the organization
- Bundle volume: Consolidate spend and volume from one or fewer suppliers than the status quo, for example, within a spend category
Learn more about how to use bundling to drive procurement savings.
4. Optimize Specifications
- Standardization of specifications or products/services, or adaptation to industry standard
- Change of materials, raw materials or components
- Use suppliers actively in the process both in terms of expertise and input
- Will often have a great effect on prices, but isn't always possible to implement
5. Reduce Consumption
- Evaluate whether all business purchases are necessary
- Establishment and follow-up of policies/guidelines to minimize over-consumption
6. Redefine the Supply Chain
- Remove unnecessary intermediaries in the value chain that do not create added value
- Assess e-commerce solutions and P2P automation to streamline processes
- Streamline inventory management
7. Insourcing / Outsourcing (Make-or-Buy Decisions)
- Analyze the cost of insourcing compared to external spend
- Analyze the cost of outsourcing compared to doing it internally
8. Strategic Partnerships
- Integrate the value chain with important suppliers to improve efficiency
- Enter into collaborative projects with key suppliers to identify win-win situations
- Bundle volume with other players
If you're interested in learning more about how a fact-based approach to procurement can help you save money, create value, and exceed results, visit our Strategic Procurement Simplified page to download the guide.