6 Ways to Shave Procurement Costs

Even with economic conditions improving and business pipelines filling back up, most buyers are focused on a single, critical goal: cutting costs. And though critical imperatives such as reducing supply chain risk and enhancing strategic value both remain top of mind for organizations, the bottom line is a primary concern for buyers across many different industries.

Fewer resources and executive growth imperatives are driving at least some of the buyers’ cost-cutting initiatives. According to The Hackett Group’s 2013 Procurement Key Issues Research, procurement departments are working to meet projected enterprise-wide annual revenue growth targets of 6.5% with fewer financial and personnel resources.

To achieve this revenue goal, The Hackett Group says procurement managers will “embrace new or evolving approaches to sourcing, category management (lifecycle versus episodic), and supplier relationships, with an eye toward building enterprise revenue by holding the line on costs, or more likely reducing them.”

Getting the job done

Electronics buyers looking to shave procurement costs without sacrificing product quality, fast delivery times, or their own departments’ precious man-hours, should follow these six tips for success:

  1. Take a holistic view of the purchasing process. “Don’t try to eke an extra 3% savings out of an item that costs 6 cents—even if you’re buying thousands of that item; it’s just not worth your time,” advises Steve Vecchiarelli, vice president, supply chain solutions at Hotenda Corporation. “Look at how much your time is worth and focus on the processes that drive down the soft costs of doing business.”
  2. Know that your time is money. If your time is worth $50 an hour, then spending 30 minutes calling six different vendors to quote a price for 5000 pieces of a 1-1/2 cent part isn’t very good use of your time. What feels like a “win” will actually go in the loss column for your organization, which will pay out $30 in labor to save $15. “This happens on a daily basis at companies,” says Vecchiarelli, “and it’s something to watch out for and avoid.”
  3. Seek out the “perfect order.” Buyers can save a lot of money by taking the focus off product price and putting it on elements like ease of order placement, on-time delivery, product quality, and even the condition of the packaging when it arrives at the dock door. When all of these elements are in place,” says Vecchiarelli, “the efficiencies that result will drive down overall costs and play into that ‘holistic’ view that all buyers should be thinking about.”
  4. Look at historical data. In Five Ways Your Procurement Could be Leaving Money on the Table, supply chain management consultancy Kinaxis says buyers can save money by examining a few key data points. To eke out those savings, the company says total past spend with a given supplier, total projected spend with a supplier in the future, total projected demand by product, and key cost drivers in manufactured products (computer companies, for example, understand that processor chips from Intel or AMD are key cost drivers for their products, so they focus significant energy on negotiating for these main components), should all be factored into the supplier selection process.
  5. Use spending profiles for key suppliers. Create a spending profile for every supplier and then use that profile or analysis to figure out what’s being purchased and from which sources, how much is being paid for it, and how well those suppliers are meeting the company’s needs (in terms of delivery times, for example). Figure out where the dollars are going both on contract and on an occasional-buy basis. Looking specifically at annual spend, rate your suppliers with an “A,” “B,” or “C,” with A being the highest volume and C being the lowest. “This will help you focus your cost reduction strategies in the high-volume areas,” says Robi Bendorf, founder and director of Bendorf & Associates in Monroeville, Pa., “and then work your way down the list in descending order.”
  6. Explore alternative suppliers. If you’re working with a supplier that’s considered “high priced” within its industry, consider alternative sources of the products or materials. Pay attention to the factors outlined in #3 above, says Vecchiarelli, and if you can get the same perfect order service from the new supplier, consider making the jump. “You may be able to access a part with the same form, fit, and function as the higher-priced item,” says Vecchiarelli, “just more cost effectively.”