Are you a CFO or controller looking to increase your procurement cost savings?

Then, this blog is for you. Most businesses struggle with finding the right procurement strategies to lower their procurement costs and increase their cost savings. In this resource, we’ve gathered everything you need to know about procurement cost savings and the next actions you should implement in your company to avoid big spending.

We’re going to cover:
1. Fundamentals of procurement cost savings
2. How to leverage your spending to negotiate better pricing and deals with suppliers

What Is Procurement Cost Savings?

Procurement cost savings means reducing your company’s expenses throughout your purchasing process.

Procurement cost savings is not just about getting the cheapest price from your suppliers. Still, it’s also about lowering your maverick spending by optimizing your entire system by lowering your overall costs while maintaining quality products and performance.

Here are some things you need to understand about procurement cost savings:

• It involves looking for favorable terms and conditions from your key suppliers and building better supplier relationships, which includes competitive bidding, delivery costs, volume discounts, and long-term contracts
• It also involves optimizing inventory management throughout your procurement process to avoid risks of rogue spending
• To save costs, you need to find a system to help you do away from manual tasks and increased labor costs by looking for automation software to help you streamline workflows.
• You must leverage technology to avoid unnecessary expenses to achieve procurement cost savings.

Why Is Cost Reduction Necessary In Procurement?

Procurement cost savings are any procurement department’s primary KPI (Key Performance Indicator). Understandably, procurement professionals focus on this one main performance indicator.

There is a lot of evidence of procurement focusing on savings.

As per the recent survey conducted by Deloitte, 79% of CPOs (Chief Procurement Officers) indicated that procurement saving is their top priority. 57% said that managing risk is their key KPI.

The results make sense because priorities depend on the industry and the maturity of the procurement department.

All CPO’s should focus on all the four areas mentioned below.

I would argue that a sole focus on procurement cost savings is not a good strategy in the long term. The key to procurement success is the ability for procurement to better stakeholder engagement. If the stakeholders are engaged, procurement savings will follow.

There are multiple reasons why procurement cost savings are the main focus of the department.

Easy To Track

This is the most objective and easy way (if done right) of measuring procurement performance.

Also, this is the primary mission of the procurement department in most companies. So, no doubt, this is an obvious and tracked procurement performance indicator.

Impact

It has a direct impact on the bottom line as compared to other metrics like risk mitigation.

I am not saying risk mitigation is unimportant, but most people only understand the value when the risk occurs. Like car insurance, you only understand the value when you need it.

Depending on the industry, cost savings could be a major lever that senior management can use to drive higher EBITDA margins.

By implementing a simple cost control (i.e., approval process), companies can easily reduce 2-3% of their cost, whether that is through increased purchasing efficiency or just cost avoidance. Click here to schedule a demo, and we will walk you through a proven cost control framework to reduce costs.

Cost Savings And Cost Avoidance

No discussion about purchasing costs is complete unless you differentiate between cost savings and avoidance.

Procurement should track cost savings and avoidance to understand better the total value procurement delivers.

Cost Avoidance Strategies

As per CIPS.org (The Chartered Institute of Procurement and Supply

“Cost avoidance is a reduction in cost resulting in a spend that is lower than would otherwise have been if the cost avoidance exercise had not been undertaken.”

Cost avoidance is also called “Soft savings.” Soft savings are about preventing your company from uncontrolled spending and any potential maverick spending.

For example, You are currently paying $10,000 for a BI tool yearly subscription. The vendor sends you a renewal contract, which includes a 10% increase from the previous year. You use your negotiation prowess to avoid the 10% increase in the cost, maybe by signing a long-term renewal contract.

So, you avoided an increase in cost, an example of cost avoidance.

Cost Savings Strategies

Cost savings, on the other hand, is tangible also called ‘hard dollars’. CIPS refers to this as cash-releasing benefits.

Let’s take an example.

You currently purchase printing paper from a single supplier at $30 per case and 1000 cases annually. Assume nothing else changes, print volume, etc. So the total annual cost in this case is $30 *1000 = $30,000

As a result of a sourcing event, you reduced the cost from $30 to $28 a case, a 6.6% reduction in cost.

The total annual spend is $28*1000 = $28,000, resulting in $2000 per year savings.

A common argument is why cost avoidance shouldn’t be measured as savings. There are two views on this.

Finance Department

Before understanding how the finance department views procurement cost savings, let’s look at how finance departments prepare their budgets.

Generally, two common approaches for preparing the budget are zero cost budgeting and Incremental budgeting.

If the finance department uses incremental budgets, they generally take last year’s budget and add increments wherever they have visibility. For example, yearly merit increases and benefits cost increases.

So, in most cases, they might not include an increase in the cost of a product or service in the budget unless it is pre-negotiated in the contract.

Zero-cost budgeting needs to justify each line in the budget, which might force the stakeholders to review whether an item is required.

In both cases, you have a yearly budget; in most companies, the budget is very granular and, in some cases, at a vendor level.

Let’s take the BI tool example, where the vendor proposed a 10% price increase.

Finance has $10,000 in its annual budget for the BI tool, so even though you negotiated the cost down, the budget is cost-neutral. So, it has no impact on the budget and doesn’t impact the bottom line.

In contrast to that scenario, you reduced the BI tool cost to $9,000 a year. This is a $1000 reduction compared to the $10,000 annual budget and hence directly impacts the bottom line and this is considered “Cost Savings” or “Hard dollar savings.”

Stakeholder View

On the other hand, procurement stakeholders have a different view of the value delivered by procurement.

Let’s take an example of the BI tool, if procurement was not able to negotiate the contract to be cost-neutral, the budget owner would have to either ask for a budget increase or cut cost in the discretionary spend to meet the budget targets.

So, your stakeholders would appreciate the value-added, whether cost savings or cost avoidance.

Should we measure and report Cost avoidance?

So, the big question is whether procurement should report cost avoidance.

The answer is it depends.

A CPO should consult with the company’s CFO on this and then decide whether to report to finance. I believe you should track and at least report to your stakeholders on the value-add.

Why should you still do it?

It improves procurement team morale. No matter why the cost increase was not factored into the budget, the sourcing team is spending time on these initiatives. If cost avoidance is not considered a value-add, it demoralizes the team because they feel their work adds no value.

No matter how proactive the procurement team is, you will have scenarios where the result of a sourcing event is cost avoidance.

It helps to summarize the total value delivered by the procurement team, especially when presenting procurement value-add to your stakeholders.

What Are The Types Of Procurement Cost Savings?

No discussion about savings is complete without looking at different types of cost savings.

The different types of cost savings are mostly from a finance view, the difference in how finance looks at savings. Also, these savings are cost savings and not cost avoidance.

There are two types of budgets in an organization

Capex

Simply put, a capital budget is to purchase assets.

For example, the purchase of new machinery or a server. This is generally a below-the-line expense; it impacts the company’s cash flow but doesn’t impact EBITDA.

And the official definition, as per Investopedia is “A capital expenditure is incurred when a business spends money, uses collateral or takes on debt to either buy a new asset or add to the value of an existing asset with the expectation of receiving benefits for longer than a single tax year.”

Opex

This is the cost that a company incurs during its day-to-day operations.

For example, software maintenance, supplies, etc. This is also called above-the-line expense, impacting EBITDA or, in other words, the Company’s operating margins.

The official definition, as per Investopedia, is “Operating expenses, on the other hand, are expenses incurred during the course of regular business, such as general and administrative expenses, research and development, and the cost of goods sold.”

Here is a good comparison between Capex and Opex

Source

Now, since we understand the different types of budgets, let’s see how they relate to savings.

Capital Cost Savings

These are the savings negotiated towards the capital budget.

The impact of these savings is generally on cash flow, but savings in the capital will help drive additional investment in capital assets, which is a good long-term investment.

Opex Cost Savings

There are savings reported towards the Opex budget. Companies pay more attention to Opex cost savings because of its impact on EBITDA.

Cash-flow Savings

Favorable payment terms generally drive these.

For example, your Company moved payment terms for $100M in spend from NEt 60 to Net 90. That is a net gain of 30 days, and you pick up a nice one-time cash flow increase depending on the change’s timing.

How Do You Make Cost Savings In Procurement?

You can increase your cost savings in procurement in many ways, ranging from quick wins to long-term strategic approaches.

Here are some key strategies you might want to consider:

Short-term Initiatives

• Review your contracts: Make sure to scrutinize all your contracts for hidden costs, outdated terms, and any opportunities for renegotiation with your current suppliers. In that way, you can monitor your spending patterns and have more chances to save administrative resources. In addition, this will also help you review contract terms with your suppliers.
• Change specification: Analyze if your products can be adjusted without compromising your quality
• Eliminate maverick spending: Check what are the cost drivers in your company. Then, implement controls to minimize these.
• Leverage your data: You must monitor your historical purchasing data. Apart from using this to help you make better-informed decisions, it also serves as a risk management effort as it helps you monitor operational expenses better. With analytics, you prevent unnecessary spending for your business.

Medium-term Initiatives

• Consolidate vendors and deliveries: Group similar purchases from fewer suppliers to leverage volume discounts and streamline logistics.
• Investigate outsourcing: Consider outsourcing low-value, high-volume procurement activities to specialized providers for potential cost savings.
• Implement category management: Group related items into categories and develop dedicated strategies for each to optimize spending within those categories. In this way, you prevent excess inventory.
• Centralize procurement (or your procurement analytics): Streamline and standardize procurement processes across the organization to improve efficiency and visibility.

Long-term Initiatives

• Invest in technology: Implement procurement software, e-sourcing tools, and analytics platforms to automate tasks, improve data visibility, and support data-driven decision-making. This will help you prevent excess inventory and make better-informed decisions. Technology can bring you real-time visibility on the status of your expenses.
• Build strong supplier relationships: Develop collaborative partnerships with key suppliers to explore joint planning, cost-saving initiatives, payment discounts, and innovation opportunities.
• Optimize inventory management: Implement forecasting tools and inventory control strategies to minimize stock levels and storage costs while avoiding stockouts.
• Reduce procurement risk: Proactively manage risks like supplier dependence, price volatility, and quality issues to prevent future cost surprises.

Procurement Cost Savings Framework

There are multiple ways for procurement professionals to approach cost savings.

The first step is to create a savings framework. We will discuss a model proposed by Capgemini

Source

There are 3 focus areas discussed in this model

A) Purchasing Demand Management

Purchasing demand management is focused on internal stakeholders and looks into better demand management and cost reduction. Let’s look at some examples

1. Consumption Reduction

This is the most common case where operations can find a way to reduce product consumption. This could be because of

• Cost avoidance – why do we need this product?
• Demand reduction – overall demand reduction because of market conditions. Procurement has little influence over this.
• Efficiency – Operations are more efficient, and waste is reduced.

2. Spend Consolidation

This is the most commonly used strategy for cost reduction. Let’s say you are purchasing 3 different types of laptops: one for executives, one for middle management, and one for junior employees. This could be 3 different models.

You can reduce the cost significantly by standardizing to a common model and then leveraging volume discounts to reduce cost. Look for item standardization, and savings will follow.

3. Improve Product Specifications

Improving product specifications can significantly reduce costs, and often, companies leave money on the table. Let’s continue with the example of the laptop.

Your IT team currently purchases a laptop with the best specifications, including different types of ports, a 5-year warranty, a longer battery life, etc.

With all these specifications, the cost increases. Granted, this is the best laptop you can get, but do you need 5 – 10 different ports on your laptop? Do you need 5 years warranty?

Asking these questions can lead to getting rid of unwanted specifications. With that, you get a cheaper product and make the product a commodity. The simpler the specifications, the more suppliers can supply that.

B) Supplier Base Management

Supply management is focused on external stakeholders – suppliers. Let’s look at some strategies under this group

1. Increase Competition

This is straightforward: find opportunities to increase competition, which helps reduce costs. This goes hand in hand with an internal focus on standardizing the specifications.

If you have non-industry standard specifications, you have fewer suppliers.

For example, if your stakeholder only wants to purchase a specific brand of laptop, then you have limited leverage, but if that is not the case, then you have more suppliers who can provide the product. More competition, better pricing.

However, ensure that the vendor is qualified and meets your standard specifications.

2. Restructure Relationship

This approach is focused on increasing collaboration with existing suppliers to find opportunities for cost reduction.

Looking at competition among suppliers, you must find a vendor that will suit your needs and negotiation. It should all be outlined in your contract management.

You already do this if your company has a strong vendor development program.

Let’s say you purchase a widget from a vendor that is shipped in vendor-standard packaging. You want to reduce the cost, so you work with your vendor for cheaper packaging that still meets your key requirements.

This is a cost reduction for the vendor and cost reduction for you, a win-win scenario.

3. Restructuring The Supply Chain

This approach needs a deeper engagement with the business to evaluate the supply chain for cost savings.

A common result of this approach is a low-cost country sourcing strategy

You might also decide that you probably want to move to a distributor model vs direct purchase from the manufacturer. Yes, you have an additional cost, but the cost savings come in the form of lower logistics costs and internal headcount.

All the strategies mentioned above need a deeper engagement with your stakeholders.

C) Total Cost management

Techniques under this group are focused on reducing the total cost of ownership. Some of the techniques are

1. TCO Analysis

This includes looking at the total supply chain cost and inventory carrying cost.

The carrying cost could vary from 20 – 30%, depending on the industry.

An agile supply chain can not only lead to enhanced flexibility in meeting internal stakeholder demands, but initiatives like Just in Time (JIT) can lead to significant inventory reduction. JIT might not be for all companies, but it is worth an assessment.

2. Vendor Managed Inventory

Moving to a vendor-managed inventory can free up your internal resources because forecasting and demand management functions are transferred to the supplier.

The only caveat with this approach is that a vendor must see the demand forecast.

That includes market condition changes or internal factors like sales promotions, which could lead to a spike or slowdown of inventory consumption.

3. Reducing Transaction Cost

Transaction costs are another factor to consider while assessing the total cost of management.

For example, there is a transaction cost for issuing purchase orders and processing invoices.

If you purchase materials from the supplier based on a fixed schedule, do you need purchase orders, or could this be handled more efficiently?

D) Cash Flow Savings

The savings in this area primarily focus on working with your suppliers to manage the cash flow. Key techniques

1. Structuring payments to meet the cash flow requirements

Procurement can help structure the contract in a way that helps companies meet their cash flow requirements.

For example, quarterly payments vs a single annual payment for maintenance contracts. Another example is to structure the payments based on different milestones.

2. Extending payment terms

Another common technique is to extend payment terms.

If you are just getting started, focus on your high spend vendors because that will give you the most boost in the cash flow. You can then work overtime to extend payment terms for the rest of your supply base.

How To Measure And Track Procurement Savings?

Now let’s look at the most important cost savings and avoiding maverick spending- tracking it!

A few aspects to consider

Tools vs. Excel approach

Whether you use a tool or Microsoft Excel to track savings, the important aspect is a discipline to track savings as and when they are realized.

You can add the module to savings tracking if you already have procurement technology like spend analysis tools.

The benefit of using a tool is that your team gets an integrated experience from saving opportunity identification to execution. Savings tracking becomes automated, and you can be assured that all your savings are captured.

You can create a simple Excel template if you don’t have a spend analysis tool. If you are looking for a simple tracker, you can download the procurement cost savings excel template.

Whether you use an Excel template or an automated system, ensure all team members can access that.

What to track?

There are a few important aspects of what you should always capture

• Department – So that you can report on savings by the stakeholder department.
• Spend type (Capex/Opex) – So that you can report on savings by spend type.
• Type of savings – so that you can report on the different types of savings. That typically includes Cost Savings, Cost avoidance, and Cash Flow (payment terms extension) savings.

The Discipline Of Updating Saving Numbers

The procurement team should be disciplined to update the savings numbers every week or every other two weeks. Here is why

• When the CPO is looking for savings achieved to date, you are not scrambling to gather numbers. The number is always updated and readily available.
• The team can easily track their performance compared to the savings target.
• As the department owner, you can be proactive if the team is not close to meeting the savings target.
• If a team member leaves, you are assured that their savings are captured in the tracker.

Reporting Procurement Savings

This is the most important aspect of procurement value add. If management doesn’t see the impact of savings, the conversation may be similar to something like this.

So, procurement should report savings in a way that it can be traced back to the income statement. In this section, we will cover everything you need to know about procurement savings reporting.

Whom To Report?

So the obvious question is to whom should procurement report the savings?

First, it depends upon the procurement reporting structure in the organization, and second, the engagement level with the stakeholders.

With that said, the following are the 3 most common stakeholders for reporting savings

1) Savings Report For Stakeholders

Procurement should report cost savings to the individual stakeholders they support. This report, of course, is specific for each stakeholder.

The key difference with this report is that it focuses on cost savings and avoidance.

Cost avoidance might not be a significant value-add for finance but this is important in this report.

In all, you want to show the value added by procurement, and there is no better way to do this than by showing cost savings (both hard savings and cost avoidance).

2) Savings Report For CFO

This is probably the fastest way to elevate procurement value add.

CFOs, of course, care about cost savings, so make sure you present savings in a way that can relate to the Income statement.

In this report, you might want to focus on Hard Savings because that is what finance cares about.

3) Savings Report for COO/ Head Of Department

If procurement is not reporting to the CFO office, the savings report should also be presented to the COO or head of a department.

The COO might be more involved in operational savings in smaller organizations, hence the need for spending reporting.

What To Report

Depending on the stakeholder, your reporting requirements might change, but the following are the common reporting metrics.

1)Addressable spend and Savings

In this report, you show the impact of procurement on the total spend.

Addressable spending refers to a portion of the total spending a procurement team can address.

The reason to show it this way is that most organizations measure procurement value-add on the total spend, which is untrue.

Let me explain with an example.

Company A has a total spend of $500M; procurement savings was $5M

So, as % of total spend, procurement savings is 1 %. But is this a true picture?

In reality, it looks something like this.

Of course, this is a hypothetical example, but as you can see, the impact varies based on what you consider addressable spending.

2) Capex vs. Opex

This is the most common view required from a Finance perspective.

You should break up your savings report into Capex vs Opex.

The simplest way to do this is to maintain your savings by the type of project. Capex vs. Opex, and then it should be simple to report on this. For more on this, see the reporting format section.

If you don’t know whether it is Capex or Opex, read the section above about the type of cost savings.

You can always ask your stakeholders or your finance team. Opex reporting is especially critical because it impacts EBITDA.

3) Savings By Department

The title is self-explanatory. However, this report is important from two perspectives.

Stakeholder view: From a stakeholder perspective, they need to see the impact of sourcing on their department. So, sourcing should be reporting department savings.

Sourcing view: From the Procurement/Sourcing team perspective, it is important to track savings by department.

Since savings are still a major performance indicator, it is easy to see which departments contribute to the total cost savings.

Doing a Pareto analysis to understand effort and results might not be a bad idea. It is common to see that 20% of effort in a certain department generates 80% of cost savings.

You may also realize that certain departments are not generating savings despite your best efforts. Understand why that is happening and take corrective action.

A sample report is as follows.

I am not saying that you should stop engaging with department/s with no savings, but that would help you with proper resource allocation.

For example, you don’t want your top performer to focus on a department that doesn’t generate savings.

Reporting Frequency

How often should you report the savings? It is, of course, dependent on the stakeholder. Here are some recommendations

1) Stakeholders:

Your stakeholders are the different departments you interact with frequently. In this case, you might want to share the data every month.

Some of you might be concerned that it might come off as bragging if you show up every month to discuss how much money you are saving. On the other hand, if savings are not significant, there is nothing to discuss.

That is why you mustn’t just talk about savings.

It would be best to meet key stakeholders to do an operations review. Things that should be covered in the operations review

Inflight projects status and next actions.

Savings delivered to date- this should be a quick update, but it is important to provide a snapshot of value-add. Keep in mind that you are reporting cost avoidance in this report. This is the total value added.

What are the key challenges at this time and how to address them?

Review of project pipeline so that you can align your resources.

2) Senior Management

It depends on company to company and how deeply procurement is engaged in operations.

There should be a quarterly savings update or every 6 months, depending upon the management need.

Here, the focus is on cost savings delivered vs. target and the type of savings. The other focus area is the savings pipeline and the forecast for savings.

Reporting Format

Since we have decided on what to report, let’s look at some of the most common reporting formats. There are mainly two different views in which management reports can be provided

A) Planned vs. Actual

As the title suggests, this is planned vs actual savings.

The plan comes from your annual savings planning exercise, and the actual savings are achieved.

The savings pipeline should be broken down into quarters to achieve this report.

For example, if your annual savings plan is $1,000,000, then your quarterly pipeline could be Q1: $300,000, Q2: 100,000, Q3: 250,000, and Q4: 350,000. The quarterly plan would differ from industry to industry based on the spending cycle.

Having a savings pipeline not only helps to have better visibility but also helps with better resource planning.

B) Different Budget Type

A very common senior management requirement is to see the savings impact of Capex and Opex.

A simple reason is that Opex impacts EBITDA, and Capex impacts cash flow. So management wants a pulse on the savings impact on the EBITDA quarter-by-quarter

C) Income Statement View

Procurement is viewed as a cost center is most of the organizations and in many organizations, procurement is part of shared services organization, the reason for that grouping is that it a service required to run operations, for example, HR.

This reporting view presents procurement as a profit center vs a cost center. Let me explain what that means.

A typical Income statement sheet looks like this,

Warning: Apologies to my accounting friends; I have simplified the statement to explain the concept, So please don’t check this for accuracy!

Let’s assume there is no procurement department at this time and there is a potential to reduce the cost by having a strategic focus on cost reduction.

Now, in this case, let’s assume there is a procurement department, and procurement value-added, in this case, is savings delivered.

Assume that procurement was able to deliver 10% savings across the board.

The cells highlighted in green mean procurement was able to impact the spending. The savings have no impact as research and development is mostly headcount in software companies.

Total savings added = Subscription ($50,000) + Sales and Marketing ($50,000) + General and Administration ($50,000) = $150,000

Now, there are two ways of presenting these results

1. Increase in operating margin

As you can see in the example above, the operating margin increased from 16.67& to 21.67% due to the cost savings. In this case, operating margins increased by 5%.

2. Increase in revenue:

This is a little complicated, so let’s break this down

Assume there were no cost savings and the only way to increase the operating margin is to increase revenue. So you may argue that is this is not mutually exclusive, for increasing the operating margins companies look at increasing revenue and reducing cost.

You are right; I am just assuming that if the only way to increase margins was to increase revenue, what would the case look like?

So, to increase operating margins from 16.67% to 21.67%, the company has to increase revenue, and the costs would also increase. Let’s assume that the company decides to sell more software subscriptions, so assumptions are as follows.

• The cost of research and development remains the same. The assumption is that you can maintain the same development headcount and sell more subscription services.
• The other costs in procurement increase with the revenue as a fixed percentage of revenue. So, as revenue increases, the COGS cost, sales and marketing, and General and administrative costs increase.

So, the revised view is as follows.

So to roughly have the same amount of operating margin (21.43% as compared to 21.67% in the previous example), Acme software company has to increase subscription revenue from $1,000,000 to $1,500,000 – an increase of 50%

So, essentially, the savings delivered by procurement is equivalent to a 50% increase in revenue.

I am unsure if any procurement organization is using this view for reporting, but it is worth discussing with your finance team to see if you can use it. To operationalize this reporting view, you need to understand your cost structure, and your finance friends can help you. Don’t do this alone!

Operationalizing savings

It is not uncommon to see situations like this.

Source

So, as head of purchasing, what can you do to avoid such scenarios

1) Define The Scope

The project’s scope should be clearly defined, and procurement should get a sign-off before starting. For example, The project aims to purchase 3 laptops with the agreed specs. Common things which lead to scope creep are

• Different specifications – the stakeholder might want a better specification than what is defined in the RFP. The common argument is that we can buy a better product at the same price. That is why your specifications should be part of your RFP requirement template.
• Increased quantity: Since we have reduced the price, let’s buy 2 more widgets on the same budget. Again, you can return to that if you have signed off on the requirements.

2) Work with Finance

When it comes to realizing savings, finance is your best friend. Work closely with your finance team to define a cadence for capturing savings and adjusting the budgets. If your finance team is adjusting the budget after savings are negotiated, there is less chance of scope creep.

What Are The Challenges In Implementing Cost Reduction Measures?

Implementing cost reduction measures is rarely a smooth ride.

It posts a set of challenges that your company needs to be aware of. Here are some of the common challenges you might encounter along the way:

• Resistance to change: Employees may fear job losses or disruptions to their routines, making them hesitant to embrace new cost-saving measures.
• Short-sighted focus: Companies may prioritize immediate savings over long-term benefits. This kind of poor planning might lead to quick fixes that don’t even address the root of the problem.
• Inadequate data analysis: Without your accounts payable team having accurate data on spending patterns and potential savings opportunities, it’s difficult to make informed decisions about where to cut costs.
• Communication problems: Procurement cost reduction might be problematic because of communication between management and employees. This issue can lead to misunderstandings and resistance to change.
• Sustainable savings: Maintaining low costs in procurement over time can be challenging, as companies may revert to old habits or encounter new obstacles.

How Can ProcureDesk Help You With Cost Savings?

With ProcureDesk, you can set the right approval process so that the right people in procurement or finance department are reviewing the requested items before the purchase happens.

The system automatically assigns purchase approvals. Your employees don’t need to know who needs to approve the purchase.

You can configure the purchase approvals based on the amount, department, location, budget owners, and much more. You can easily configure your custom approval workflows.

The system checks the requisition against the purchase approval workflow and then identifies the required approvers for the purchase.

Here is an example of how the system identifies the purchase approvals:

In this case, the requester is John, and Mark is the approver who will review the approval request.

All the employee needs to do is submit the request for approval.

Once the request is submitted, the system notifies the approver of a pending request.

The approver can approve from the email without logging into the system or using the ProcureDesk mobile app for approvals.

The requester can track the status of the purchase requisitions from the purchase request dashboard.

For example – you can see what requests are pending approval or if the buyer has already issued the order for a purchase request.

Aside from that, ProcureDesk also has a cost control dashboard to help you see all your spending in one place. 

For example:

You can see what you are purchasing, from whom, and who is purchasing within your company.

You can monitor monthly expenditure patterns to stay informed about purchasing trends within your company.

Alternatively, you can monitor vendor payment terms and identify opportunities to negotiate more favorable terms.

Extending payment terms is a crucial lever for enhancing cash flow.

Establishing a positive credit history with vendors underscores the importance of transitioning to an invoicing process to build that credit history.

As your operations expand, consider paying vendors earlier than the agreed terms to take advantage of early payment discounts.

Utilize the open order report to keep tabs on your outstanding commitments.

This report provides a quick overview of open purchase orders, invoiced amounts, and pending invoices, offering valuable insights for more effective spending planning.

FAQs

What Is Cost Advantage In Procurement?

Cost advantage refers to a competitive edge gained by lowering the costs of a product or service. This is achieved through economies of scale or optimized processes.

What Is Cost Reduction In Procurement?

Cost reduction in procurement refers to deliberately lowering procurement expenses through various methods like negotiation, consolidation, or process improvement.

Cost Reduction vs. Cost Cutting

Cost reduction prioritizes long-term value and efficiency. At the same time, cost-cutting focuses on short-term savings, which can sometimes sacrifice quality or sustainability.

What Are The Disadvantages Of Cost Reduction?

The cons of cost reduction are its potential harm to employee morale, quality, or even supplier relationships if implemented in your company poorly.

What Are The Elements Of The Procurement Process?

The common elements of a procurement process are as follows:

• Supplier sourcing
• Negotiation
• Order Placement
• Receiving goods
• Invoice processing
• Payment

What Role Does Cost Reduction Play In Financial Management?

Your company’s cost reduction efforts play a key role in financial management. It helps your company maintain financial stability, meet budget targets, and achieve long-term growth.

Can Cost Reduction Strategies Contribute To Sustainable Efforts?

Cost-saving wins for your wallet and the planet!

Smart strategies like efficient processes, eco-friendly choices, and resource sharing can shrink your footprint and spending.

Savings can fuel sustainable initiatives, from employee training to green tech, creating a virtuous cycle for your business and the environment.

What Is The Role Of Leadership In Driving Successful Cost Reduction Initiatives?

Strong leadership plays a pivotal role in driving successful cost-reduction initiatives in at least three key ways:

• Leaders set the tone. Their clear vision for cost reduction should align with the company’s overall goals.
• Effective leaders empower teams to identify and implement cost-saving solutions. They encourage collaboration across departments and foster creativity to achieve better results.
• Leaders establish clear goals and metrics for cost reduction initiatives. They provide ongoing support and resources, hold teams accountable for progress, and adjust strategies as needed to ensure successful outcomes.

How Does Global Supply Chain Management Impact Cost Reduction Strategies?

Global supply chains offer two major cost-reduction levers:

• Wider Supplier Pool: Accessing lower-cost and specialized suppliers across borders opens doors to better deals and more competitive sourcing.
• Optimized Logistics: Streamlining transportation, warehousing, and customs processes across a global network can reduce logistics costs.

The Bottomline

If you have read so far, congratulations!

You are among very few who want to fully understand the integration of procurement and finance and the impact of your day-to-day work on the organization’s finances.

When it comes to savings, there is no one size fits all. There might be different reporting formats out there.

The secret is keeping your options open on different savings opportunities for your company. Your chosen software also has a crucial role in your cost savings efforts. Make sure it can help you track your indirect spending and even your inventory management.

In that way, you’ll become more confident in lowering the costs in procurement and impact your bottom line and the company’s financial health positively!