Saving in procurement is a good way to reduce costs and therefore, ensure high profits. So, finding ways to save in procurement operations is key to the success of the company.
Of course, there are methods that can lead to savings during the procurement operation. We’re going to talk about definitions, calculations, and ways to improve your procurement activity.
Definitions of Saving in Procurement
So, basically, the procurement activity is to get products and services at the right price with the most suitable supplier. Cost saving is one of the most important KPI’s of procurement, being hard savings or cost avoidance.
Usually, procurement looks at cost savings from the perspective of negative change from previous cost paid to new negotiated cost. But that only glimpses at saving potentials.
The real saving is dependent on the changes in the level of activity and stakeholder compliance to product. Of course, that wouldn’t consider the external factors, such as changes in raw commodity prices, currency fluctuations and labor cost.
Types of Saving
There are four major ways of saving in procurement, they are:
- Changes in prices and costs with suppliers.
- Improvements in productivity.
- Inventory Reduction and optimization.
- Procurement value creation or cost avoidance.
So, this will contemplate a lot of saving opportunities, from sourcing a new commodity and strategic sourcing initiatives to working capital change, with a higher order quantity per cycle.
From that, you can manage a lot of methods to reduce your costs, let’s talk about some examples.
Methos of saving in procurement
As procurement offers a lot of different scenarios, you can ensure profitability in different ways. For instance, you can negotiate a discount with suppliers, managing order volume and delivery.
You can also look for ways to avoid tail spending, which are the uncontrolled spendings of your operations and assign them to associate suppliers.
Another good practice is to control spending leakage, or the costs that aren’t contemplated by contract. Which includes payment, delivery costs and risk management.
Then, you can review purchase requirements frequently, ensuring that you are only purchasing what you need and not with unnecessary items. This leads to a more organized stock, avoiding stockouts and excess.
Finally, stock should be prioritized. Making continuous reviews of policies and levels and always seeking to optimize it.
Formulas of Saving
As established, savings aren’t reduced to the difference of prices on orders. But to a simple measurement, there is a couple of formulas that can show savings on those terms.
For instance, you can see how much you are saving from a specific order from a supplier using only the initial price and the negotiated final price, as it follows:
Initial quoted price – Final negotiated price = Saving value.
In conclusion, its necessary to keep record of every transaction performed, since they are which assures performance and indicators of operations healthy.
A well-developed strategy needs information from the whole process to succeed. Data are the principal factor on which to rely when trying to enhance your profit.
You can find opportunities of savings in a lot of aspects, for example:
- Annual spend.
- Number of suppliers.
- Spend per supplier.
- Spend per division or cost center.
- Comparison with chosen benchmark.
Cost reduction and profitability increase can be achieved with a well registered operation. Keeping in mind that they are what will offer insights on business performance.