They say the latest recession is over but already many are forecasting another. In this evolving economic environment, every organization is striving to reduce costs, as it becomes harder to increase revenue and profits. If you’re working to cut procurement costs, you might be making some mistakes that are actually costing you more money than you are saving. How can that be?
Procurement professionals are continually trying to find the savings, consumed by the notion that “a penny saved is a penny earned.” While this is indeed true, it is also true that procurement professionals are often guilty of spending many dollars to save a few cents. Cutting costs isn’t always about finding the nickels and dimes; sometimes it’s more about chasing the dollars. Here are four ways you can put an end to waste and develop a holistic approach to procurement that will literally cut your costs overnight.
1. Time is Money
How much is your time worth as a procurement manager? It’s probably at least $30 an hour, likely as much as $50 an hour, and could be as high as $100 or more per hour. Simple math shows that spending your valuable time trying to find 5 percent savings on an order of 1,000 widgets that cost 10-cents each, results in a negative return on investment.
Significant savings are rarely achieved by picking at minuscule price variations. Procurement leadership will agree that the practice of spending $100 to save $50 needs to stop so you can start spending your time on implementing strategic changes and improvements that will drive larger savings, such as conducting a spend analysis project, automating sourcing and procurement processes that are still manual, and negotiating better terms and pricing with suppliers. As soon as you stop wasting time to find miniscule savings, you’ve already cut costs. Additionally, every hour of your time you are able to put towards higher value activities is an investment of the company’s budget that will produce bigger results and a positive return.
2. Don’t Be Penny Wise and Dollar Foolish
Savings go beyond the actual price you pay for your goods and services. Instead of spending dollar upon dollar chasing pennies, look at the sum total of your efforts. Consider factors outside of price that save or cost you more money. For instance, how easy is it to order the things you need from your current suppliers? A supplier that saves you a penny a piece probably isn’t worth the cost savings if you’re spending 15 minutes a week placing orders by phone. It might be more effective to pay the extra penny to the supplier that offers easy one-click ordering online. Online shopping saves tons of time and makes it easy to compare the items you need. Plus, you can shop online any time of day. This becomes even more compelling if you have an eProcurement shopping tool with hosted catalog content like JAGGAER customers do.
As another example of costs that are difficult to measure is badly packaged material. When your order arrives damaged, it costs you valuable time to contact the vendor while incurring shipping charges to return broken goods, then more time waiting to receive the replacement shipment. Buying from a supplier who invests in proper packaging will help to mitigate these risks which will offset a slightly higher purchase price by eliminating the added costs involved with shipping delays (e.g. backorders, manufacturing delays, lost sales, damage to your brand reputation, etc.). For critical items, a shipping delay can cause problems that you’d gladly pay a small price increase to avoid.
3. What Have Your Suppliers Done for You Lately?
The performance of your top vendors can impact your ability to drive savings and often revenue for your business and therefore they should be expected to perform as valuable partners, not just simply suppliers of goods or services. Consider, for example, issues like whether your supplier consistently makes on-time deliveries and how well they communicate possible delays. If 5 out of every 10 orders you receive from an existing supplier are shipped after the provided ship date and they do not inform you of the delay in advance, you might be better off paying more to a supplier that can guarantee improved on-time ship rates and who is proactive in their communication around order fulfillment. As noted above, delivery delays can have compounding impact for your business and your most critical suppliers should be working with you to avoid those scenarios.
4. Have the Right Procurement Toolset
The last step to capitalizing on these three cost savings opportunities is the use of the right tools, specifically the right procurement software. An application that allows you to run spend analysis reports can help you identify which suppliers, categories and commodities are receiving the majority of your dollars. These are the areas where investing time to achieve pricing reductions will be most lucrative. Additionally, the right tool for eProcurement will give you the ability to drive user spending to preferred suppliers and contracts which results in longer term savings and value. Finally, a strong supplier lifecycle management tool will allow you to not only compile supplier data, but also score and rate their performance as your vendor. This will support your efforts to ensure you have the optimum supplier base for your business
Would you like to see how other businesses and organizations were able to leverage JAGGAER’s procurement solutions for spend analysis, shopping and supplier lifecycle management for cost savings? View our case studies and learn more.