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 is 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
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 want to learn more about how to take a fact-based approach to procurement costs, with live examples of best-practice analytics for identifying and realizing savings opportunities, sign up for our upcoming webinar: A Practical Guide to Procurement Savings.
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