Welcome to Thomas Insights — every day, we publish the latest news and analysis to keep our readers up to date on what’s happening in industry. Sign up here to get the day’s top stories delivered straight to your inbox.
The pressure to reduce cost puts tremendous stress on procurement professionals – but procurement isn’t simply about getting more for less.
As chief purchasing officers (CPOs) communicate with current and potential suppliers, analyze their performance, and rank their ability to address critical company needs, the cost-cutting methods outlined below can help firms compete in today’s increasingly complex global economy.
1. Cultivate Enhanced Supplier Relationships
Purchasers are constantly in search of the ideal supplier relationship because a strong collaboration can help companies address some major challenges, especially when it comes to things like transparency and visibility.
By forming a strategic relationship with suppliers, you can gain insight into the deeper corners of the supply chain, which in turn will grant you a greater degree of control and influence over the unpredictable global supply chain. This can help you make agile decisions, mitigate risks, and prepare for worst-case scenarios.
Once you have a good relationship, the job is only beginning. Continuing a relationship that benefits all parties requires hard work and a deep understanding of each other’s needs are the next steps.
2. Be Prepared with Supplier Questions
To ensure your comparison of prospective suppliers is fair and won’t lead to extra costs, purchasers should form a list of questions before researching a potential supplier. Sometimes suppliers fail to inform buyers about certain charges that the buyer must separately incur, such as the cost of goods transportation.
Other examples of nondisclosure include packaging, service calls, training, associated supplies, and financing costs (if any). To avoid unexpected fees, all of these expenses must be negotiated and reviewed.
Waiting until you’re in desperate need of a specific material or product and, as such, are forced to sign a contract quickly will likely lead to poor deals and lost savings. By coming up with a set of questions ahead of time, you can save yourself a lot of headaches down the road.
3. Exercise Flexibility and Responsiveness
When local buyers are flexible, they can work with buyers at headquarters to achieve greater savings.
It may be tempting for local buyers to thwart collaborating closely with buyers at headquarters because local buyers want to please the local managers. However, a transparent and holistic analysis of costs and benefits will serve a company best.
The best way to improve responsiveness is to be vigilant and keep an eye out for a lack of responsiveness. Examples of unresponsive attitudes include:
- Slowing down the process
- Becoming entrenched in unnecessary bureaucratic processes
- Making ineffective decisions based on subjective opinion
- Being resistant to change
4. Apply a Sustainability Mindset
While sustainability generally refers to environmental initiatives, the philosophy of sustainability can also be applied to a wide range of business processes – especially procurement.
While sustainable purchasing for manufacturers may seem like an added burden, this practice can significantly boost both savings and resource utilization efficiency. It can also help balance the increasingly complex regulations and consumer requirements that companies have to contend with today.
Some suggestions for incorporating a sustainable purchasing program include:
- Attaching a dollar sign to every initiative to let people know about the savings involved
- Calculating and communicating the lower procurement costs as well as the avoided disposal costs
- Communicating with suppliers to get insights into where opportunities exist to cut costs
- Tracking savings for the firm and its suppliers
- Deeply analyzing the entire product lifecycle and associated supply chain
5. Optimize Technology
Industry 4.0 has completely transformed the manufacturing and supply chain landscapes. These technologies can help industrial companies exert a greater degree of control and influence over the supply chain, while also improving internal processes.
Some of the digital technologies being used today for procurement applications include the Industrial Internet of Things (IIoT), big data analytics, machine learning, and cloud computing. By transferring the procurement process from the analog world to the digital realm, companies can experience a slew of benefits, including but not limited to:
- Improved communication
- Increased time to focus on value-based factors
- Actionable information in real-time
One way companies are making the most of technology in optimizing their supply chains is by utilizing enterprise resource planning (ERP) systems. This software supports businesses with everything from inventory and order management to human resources and accounting tasks.
ERP systems also aid in consolidating all functions into one system, making inter-departmental tasks easier to coordinate and execute. Although the software has been around since 1990, the technology behind it has vastly improved with the growth of Industry 4.0 to now offer more valuable business intelligence to manufacturers.
6. Look Inward
When it comes to saving money, sometimes the best place to begin achieving cost efficiency is right in your own business rather than scouring the earth for ultralow-cost suppliers.
Many companies are in the process of (or have completed) shifting to a center-led structure as a way of maximizing spending, standardizing processes, and driving efficiencies, which utilizes a core of central policies to guide operations in an agile, though “on-brand” kind of way.
This transition is not always easy. Company-wide alignment and standardization of procurement procedures and systems remain top challenges. Nor is complete centralization always practical or even desirable, as is the case in complex, distributed enterprises. Poorly aligned systems and processes can prove to be massive obstacles to success.
Improving the Procurement Process
Utilizing the six points discussed here can serve as a platform from which to make procurement a strong contributor to profits and growth. Procurement touches upon so many aspects of the business, and as such has the power to transform a company’s bottom line. Ideally, improving the procurement process involves multiple plans of attack woven into one super plan.
Image Credit: SeventyFour / Shutterstock.com
