Small businesses acquire goods and services from outside sources; this is referred to as procurement. Procurement cost reduction plays a vital role in managing your business and establishing the Key Performance Indicator. Procurement cost reduction is a process that greatly impacts the overall performance of your business. It also gives you spend analysis and supply chain processes of your business.
How Does Procurement Works
Procurement cost reduction aims to increase your business savings by lowering the procurement cost of goods of your products and items. It also strengthens your relationship or bonds with your supplier. Lowering the procurement cost of your business is one of the biggest and simplest forms of increasing your profit. Procurement savings also take into account the quality of the product that you provide to your customers.
Businesses can create their own procurement cost reduction strategies to lower their purchasing expenses and increase their procurement cost savings. But, business owners should first understand the components and types of procurement cost. You can use it to identify and know the reason why you allot a budget for that particular area.
To give you an insight into the procurement process, the following are the essential elements you must know.
- Specification Assessment
- Purchase planning
- Strategic sourcing
- Negotiating terms and conditions of payments
- Financing
- Inventory control
- Contract management
- Vendor management
What are the Steps in the Procurement Process
It is important to note that the steps you will take in the procurement process vary on its needs. Considerations are provided, especially in terms of the size of the company and the industry itself. Here is the general process that you can follow.
Recognizing the need for new innovations regarding your product. You can conduct re-ordering and have a new order for the development of your product.
The purchasing department of your company must have the details regarding your purchase requisition. It helps you to identify all the transactions that are happening in your company. It also serves as a guide to minimizing the expenses that you will incur and increasing your procurement savings.
The procurement team will then analyze the transactions or the purchase requisition that you sent. They will review and analyze every item before approving your request. It will now become your purchase order if the procurement team approves it.
Once the procurement team approves your purchase order, it will be transferred to the accounting department. They will then approve your quotation requests and budget. Once approved, you can send it to your prospective vendors or suppliers.
You will then undergo negotiations with the potential vendor or supplier regarding the contract. Both parties will reach a certain understanding that favors them.
After the contract, the goods and the services will then be provided by the company. They will receive the items that are embedded in the contract.
Since there is a contract signing, every detail in the contract should be followed. The receiving company will check and process the goods and items included in the procurement orders, vendor invoices, and package slips. The receiving company will check the accuracy of the documents.
Once your company receives the goods and services, the invoice payment will be transferred to the supplier or vendor. It follows what the contract states and creates a harmonious relationship between you and the suppliers or vendors.
Every transaction in business must be recorded to clearly identify the company’s standing and prepare different financial documents. Your records will be kept for auditing and bookkeeping purposes.
What are the Different Types of Procurement Costs
In general, there are five different types of procurement costs. It would be best if businesses will consider procurement cost reduction strategies to save money. These expenses is getting the total annual procurement report as well as the supplier terms. It is also important to note that an increase in purchasing cost will not accurately picture your overall expenses.
Base cost
Your materials’ per-item cost is the key procurement expense that your business is dealing with, especially if you are dealing with large transactions. The most challenging part of procurement cost reduction is your per-item expenses considering that it holds the highest costs. The best way to minimize or reduce procurement expenses is to look for another supplier that offers the same goods. You can negotiate and get the best possible deal per unit.
Transportation cost
One of the direct stock-acquiring costs is your transportation expenses. Having a long-term relationship and creating flexible offers with your carrier is a must to address this issue. You can easily give an offer and negotiate accordingly with the shipping rates.
Closing costs
Companies nowadays outsource the buying and selling of their inventory. Limiting this can help you save expenses like fees, brokerage, and commissions. One of the best ways to reduce this kind of expense is to hire effective and efficient employees.
Taxes and duties
Once you get your inventory overseas, you will more likely suffer from the lump amount of expenses like government charges. You will more likely suffer from taxes like GST or VAT and tariffs. It is important to note that import taxes are complicated. That is why most companies hire brokers to help them with the custom processes.
Negotiation costs. Making a contract with your supplier will drain your time for researching and creating alternative deals to get the best deal that you can have. Given that kind of situation, you will more likely engage in indirect labor expenses. This is costly, especially if you are traveling to make sure you will cost the deal.
What are the Cost Reduction Strategies
Procurement cost reduction is never easy. But, there are steps that you can follow to maximize your cost savings and the efficiency of your business. Here are the procurement savings you can utilize to maximize your supply chain, undergo spend analysis, and master cost avoidance.
Avoid or reduce rogue spending
It is also known as tail spend. These are the procurement costs that are uncontrolled and did not undergo the procurement processes. The management did not approve it, and it caused a lot of headaches. To reduce procurement cost or this type of expense, it would be best to assess their purchasing records and identify responsible for the rogue spending. Know when the transaction happened and what was purchased. You can also take this chance to train your employees with the purchasing processes and limit the tail spend.
Upgrade your technology
If you are still using the previous technology, it is time to upgrade. Though you will notice that it involves an initial cost, think of it as an investment. Remember, once you invest in technology, it can provide you automated services that will help you in your cost reduction management the future.
Supervise Risk Management
Being too dependent on your suppliers is deadly. Ensure that your procurement process does not solely depend on one supplier. It would be best if your agreement and contract will still give your company the power to decide and supervise the supply chain.
Review your inventory
The level of your unsold stocks reflects your company’s behavior in terms of buying materials or products. Ensure that you review your sales patterns to reduce costs and take action when necessary.
