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5 simple and rapid ways you can cut procurement spend and up company profitability

Updated: Jan 29

So you have financial responsibles for your company and are looking at ways in which you could cut some costs quickly? You are probably aware of how much you are spending with suppliers and, although you are certain there may be some savings to be had, you may be scratching your head on where to start and what to do.  


Either way, the challenge is obvious – you need savings, and you need them quick.


Image of person in suit running up bar graph that increases each line (like a set of stairs)

Image source: Pixabay


A procurement expert offers you a toolbox of skills and will give you access to myriad levers to pull when managing supplier costs (demand manipulation, competition among suppliers, spend management, strategic supplier alliance and etc.). However, what you need is a rapid set of simple levers that any finance leader who has supplier budgets can exercise to ensure that you curb the flow of those £££ leaving through the door of your business.


Having gone through similar scenarios, multiple times both individually and for a number of our clients, below are 5 of the most simple and effective levers to reduce that expense quickly and show the business how your heroic actions has put you toe to toe with the most expert sales person in the business to make your company profitable. After all, every pound saved, is pure profit with no cost attached to it, unlike a sales activity... mention that to your fellow leaders.


A study by McKinsey & Company found that companies that have a mature procurement approach can save an annual average of 10% on their procurement costs (1) while a report by the Association for Supply Chain Management found that the top 10% of companies in terms of procurement performance achieve an average of 17% in annual cost savings (2), so there is certainly a strong potential that you too can achieve some of these savings in your business and have a significant impact on the bottom line.


So without further a-do here are the 5 levers and how to pull them:


1. Supplier discounts

 

One of the simplest ways to save money on procurement is to contact existing suppliers and negotiate discounts with them. This can be done by asking for volume discounts, early payment discounts, or other types of money off. A study by the Hackett Group asserted businesses can save an average of 5% on their procurement costs by negotiating discounts with suppliers:


·        Volume discounts or Bundling discounts: Ask for a discount for purchasing a certain volume of goods or services which goes beyond what you have done to date. This can be executed irrespective of what you spend with them now, by consolidating all your similar spend through a single supplier. This does not have to be exactly the same goods or services, but it can be the addition of other lines which to date you have been putting with another supplier. Often suppliers are brought in for a specific need, and you may be unaware of their range of other servicesor goodss. There is a chance that you can move some of the more sporadic volumes over to create a meatier and more interesting amount of work for them, enough to get them to provide you with savings across your overall spend. The challenge of course is your contractual arrangement, but in our experience, there is a good chance that your business is spending in disparate ways with their own preferred supplier rather than in a clear and contracted way. You might be thinking, “no ours is all policy driven” or “no we have a procurement function, and we have compliant staff”, but you secretly know that if you lift that stone, you are very likely to find those non-compliant situations – think of all those recruitment firms where each senior exec has a favourite provider.

 

·        Early payment discounts: Ask for a discount for paying your bills early. Feels counterintuitive to your strategy of holding on to that money for as long as you can to maximise the cashflow? No matter the rate of interest that your bank gives you for hanging on to your money for dear life, if you reach out to a few chosen supplier and suggested that you reduced their payment terms to half on the proviso that they gave you a hefty discount on the invoice, guaranteed that you will come across a few who will beat whatever their portion of interest you get from the bank. Don’t worry, we are not suggesting you do it with all your suppliers of course, so no need to start sweating hot and cold at the thought of cashflow issues. Just select a few well-placed suppliers based on how much you spend with them and activate these levers with them based on the biggest discount you might get. For example, call the chosen supplier and tell them you will half their payment terms for 3 months on the basis that for this last remaining quarter of the year, they shave [add your target here]% off their invoices – boom! You’ve got yourself a quick saving. Furthermore, there are additional ESG benefits around a responsible approach as a payer to review payment terms closely, where smaller, but still vital vendors, benefit from faster payment.

 

·        Quantity breaks: Ask for a discount for purchasing a certain quantity of goods or services in a single order. This might not be suitable for every scenario, but just like your streaming provider gave you a discount for buying a year’s service in one, there are a ton of suppliers who’d love to get your cash for an entire as year up front; it doesn’t matter if you are business or an individual. Gives them certainty but, even though it sounds painful for you, if you break it down into different tiers, you’ll find that there are a number of them which you can afford to pay quickly. As long, of course, that it comes with a nice £££ saving…This  lever is similar  to volume discounts, but it works particularly well in the services industry. You many think it does not apply for B2B or non- software providers, but you will be surprised at how many will work with you on that if you ask the question. If you are looking at goods only, the reality is that often this is driven by a just in time approach, but there are instances where stocking up can be beneficial, especially if you know that these are items you need throughout the year and are also difficult to come by. Think about consignment buying or stock-booking. You may solve two issues in one.


Extra tip: if you want to go down to 0 spend for a few months, because you really want to go big on savings for that remaining bit of the year, some suppliers, with which you have a long-standing relationship, might be happy to oblige. Especially target those who had a good year and it is coming to their year end. Ask them to defer your invoices to the new year; Have a chat with the sales guy, if he is a superstar, chances are they beat this year’s target and would be happy to book some of the income into the new year to give them a head start..

 

·        Loyalty discounts: Ask for a discount for being a loyal customer. This might be hard to believe and, in most cases it’s difficult to get, but some suppliers will do that if you are the right type of customer. (time to shine large company who has been paying their supplier well with no market reviews for a long time). Make sure that you also remind them have you been loyal to them through good and bad times and that it is time they recognised this in some way As any good negotiator, find out what they value more before you speak to them. Maybe it is an intro or a testimonial of what good suppliers they are. It is worth a lot more than you may think and might facilitate the loyalty discount.

 


2. Contract review

 

Another way to save money on procurement is to regularly review existing contracts. This can help to identify areas where pricing can be renegotiated or where cost savings can be realized through other changes to the contract terms. In fact, a study by the Aberdeen Group found that companies that regularly review their contracts save an average of 7% on their procurement costs (3):


·        Contractual Terms fulfilment: This is one for those professional buyers or heads of which believe they have the best terms possible. I am sure you have worked hard at them and got the best you can, but ask yourself – have you checked that the benefits you or your team worked so hard to get are being fulfilled by the supplier? Have they provided you those volume or milestone discounts? Have they provided you with the rebate that a predecessor who set the relationship up and is no longer in your business has negotiated and agreed? Maybe they created a contractual dispensation to get round the table when certain conditions are met? Often suppliers have gone through an arduous selection process, even if not strictly tendered, and you are likely to have been given some “sweeteners” to ensure they won the contract but since it’s gone live, you have not requested for these. A real good example is a service credit. Once the contract is drafted and signed and put into the drawer, it often only sees the light of the day when things go wrong. Things may not have gone in this case, but if you are keen to plug that hole, it may be time you blow the dust off that document and look through those pages. Extra


Tip: Some historic contracts have changed over the years, say for example those company mobile phone contracts with all those conditions which gave you discounts. In essence, historical contracts may have provided you with benefits which can no longer be extracted due to the change in landscape, this does not mean you should not have a benefit which is more adapted to the current service you are receiving, so these should not be simply ignored and why reviewing contract terms has advantages.

 

·        Use that Expiration Term: Contracts have their term, maybe it is a fixed 3, or maybe a 3+2 years? Or most likely its one which was put in place when Amazon was mostly known for its luscious forests. Either way, it is time to stop the continued rolling of that contract and mention to the supplier that you are looking to do that soon. They might want to slow that down and get some time for themselves to prepare themselves for the “beauty parade” which you want them to take part in. Did you casually drop into the conversation about your need to make some quick savings though that you wish there was a solution to delay your tender? Have they offered you a solution? Thanks trusted supplier.  They haven’t, because you are stuck with them another 3 years? No worries, start discussing how in three years from now you will certainly go back out to market and that you will start looking around now in preparation. Any Supplier claiming to be strategic will look at that and understand it is their cue to start thinking how they can help. Extra


Tip: whilst considering how and when to trigger a renewal, it’s also important to avoid exposing yourself to a cliff-edge situation where a supplier or service you need is expiring without you having sufficient time to replace it. So you should always think carefully before using the expiring term strategy and make sure it couldn’t backfire on you, so where this lever is used, you must ensure that the ramifications have been calculated and that you do have an alternative comparable solution to use

 

 

3. Consolidation of spending

 

Sounds pretty obvious right? See some of the examples given above in Supplier Discounts section. Often the reality is that this is less than easy or obvious when you look at the number of suppliers you use and realise that there is a shed load of suppliers. Any business, irrespective of size has to constantly change and adapt to immediate requirements and as most businesses are (for now, when this was written in 2015) run mostly by people, it is human nature that you go ahead and resolve the most pressing issue you have at that moment. Often this is by bringing an external party which is likely to be able to specifically solve the issue of the moment. What that leaves over time is a myriad of suppliers that have helped the business you are working with to get to where it is.


Why am I saying this? It is because over the years I’ve learned that it is not about the issue of having that many suppliers, but it is always about showing the value of having a focused number, and here are some of the most impactful approaches under this lever, when trying to manage the most difficult part of volume consolidation; convincing your internal gatekeepers of those various supplier relationships:

 

·        Consolidation Benefits: Identify the operational benefits that consolidation can bring. Most relationships have multi-touch point, that is likely to be creating more work for those resistant parties who in turn are adamant that specific suppliers should remain. It is obvious that having a reduced number of suppliers will help to reduce the administrative costs associated with the management of those suppliers. Any colleague will be more than happy to have less to do if the outcome is the same and having less suppliers brings efficiency because of the reduced number of contact points to get a wider view of the performance.

 

·        Review Quality: If you look at similar suppliers, who can provide identical or similar solutions, then it is always easy for a resistant stakeholder to give you a reason why this one supplier was chosen for this one aspect. What you need to do is measure the most important service that your business needs from the suppliers in question and review the quality of that specific service or product. If you ask those same stakeholders who they think is best amongst those similar suppliers, they will probably know the answer themselves and will start offering up a view as to who to go with themselves. Though this activity may not seem as a quick win, if you engage with your internal stakeholders to support you in this quick savings journey, they are likely to already have a lot of this answers, meaning that, contacts permitting, you will be able to consolidate quicker than if you assessed from scratch yourself.

 

·        Leveraging Relationships: Your gatekeeper or stakeholder to those supplier relationships are themselves valuable contacts to understand what their suppliers can offer in return for volume consolidation. Ultimately you are leveraging on their relationships to get the suppliers to collaborate and work towards the outcome of quick wins and their supplier might suggest themselves how with additional spend with them, they might give you an overall reduction of your spend. Supplier consolidation means that you quickly have to get certainty of the supplier capabilities, and this can only be quickly done when working with people who already know those suppliers within your business.

 

In their report by McKinsey & Company, also found that companies that consolidate their spending with a smaller number of suppliers can save an average of 10% on their procurement costs. (1)

 


4. Review of purchasing needs

A study by the National Association of Purchasing Management found that companies that regularly review their purchasing needs save an average of 5% on their procurement costs (4). You are very likely to have a set of supplier relationships which have been built over time, or it is very unlikely that your firm is of the size and position it currently stands in. This means that those relationships will have been built or started on a set of requirements that will have morphed and changed over time. This is not an activity that requires the support of the suppliers as much as it does reviewing your internal needs. It may not sound like a quick savings activity, but it is very likely that checking what your supplier relationship agreement states against what the team who is benefiting from the services is actually using, may differ. 

 

·        Unlimited or Per user: This works mainly for service type supplier arrangements. Did you start the relationship when you were at the peak of your company’s growth and it made sense then that you had no limits on your usage of the supplier’s services? Your usage may have drastically changed or simply does not require that much flexibility as you have stabilized your usage. Press the supplier on the flexibility aspect and see what your cost should be on specific per license or per user cost. Now that you know how or who uses their services, your internal team may suggest themselves that they don’t need that level of flexibility and that in fact it is a limited number of people who use the services. Alternatively, it could be the exact opposite and your usage might have a discount driven by a different type of arrangements with the suppliers, I.e. a reduction in cost driven by companywide or unlimited license compared to usage based. Though this may seem as something which you’d expect to be in place, it is very common that given the everyday 7demands of work this has not been monitored as closely over a period of time.

 

·        Removal of added features: Whether buying a good or a service, a historical relationship with a vendor is likely to have been set up when their service was new to your firm and therefore you did not know whether you needed some of the additional features they provided you with. Going through these with your internal users of the services or buyers of the goods might show you that there are some features or additions that you can do without and the supplier can also therefore charge you less for. As with the one above, it might not be the service or goods which you consume the most, but it is still likely to be one of the top ones which will benefit from reviewing the usage.

 

·        Leveraging Innovation or Evolution: Of the levers identified in these, this might be something which takes a little more time and the support of the Supplier. Your driver with the supplier should always be that you are looking for efficiencies and cost savings so that there is a benefit for the supplier to help you with this in terms of longevity of the relationship as a vendor who adapts with your needs rather than one which has a shelf life. Involve them in providing you with what could be a new service they offer which reduces your cost or one from elsewhere in your supply chain that they couldalso do in a more efficient way. Either way, it is likely that there has been a movement in the service or goods provided to you and that you are not seeing the benefits as of yet, so it is important to ask the suppliers what innovative approaches, they have developed to help you in your quest.

 

 

5.Controlling maverick spend

Right, are you serious about wanting to get a quick saving? It may require the need to do something a lot less popular and this is to deal with those few people who have not been as compliant. Unfortunately this does mean that you have to have that conversation with your senior team and be clear that you need their support. Probably the best time to do it is when everyone has been tasked with finding quick savings. A study by KPMG found that companies can save an average of 3% on their procurement costs by preventing maverick spend (5). Here are some of the levers that you can use to ensure that those hard-fought savings you have achieved are being used by all your company, and this case, they should be followed sequentially:


·        Supplier Driven Data: Use the suppliers and get them to help you with this. It is in their interest to do so and you quickly marry their figures with yours and see if they are achieving the numbers they should be. Hopefully you have a system which allows you to extract your internal data, but if that is not the case, you no doubt can still split out which similar suppliers have been used in AP systems and then review them against the contracted supplier spend. Your aim is to identify what the gap is and then ask the supplier themselves to give you a view of what the spend could have been under the full cover and then use this for the next step of your approach. It gives you the reason.

 

·        Policy: This is probably the least interesting one but can also be one of the most powerful tools. Policy driven, either specific to something like, for example, your travel provider or generally around third-party expenditure which must be first checked against your existing database of suppliers, before engaging any new ones. A spend policy can be a useful tool not only for managing your internal maverick spend, but also as a tool to use with your suppliers to get better rates. “If you want to be part of our panel, you need to give us preferential rates”. The benefit of a policy is that it gives you the ability to give a framework or structure to use with your colleagues and a solution through your existing supply chain. It also created the need to have to really put effort into going against the policy, therefore actually giving you certainty that the exceptions are likely to be valuable exceptions and vendors which have a unique service which your business really needs. The aim for a plicy is to give you the person ultimately reporting the financial performance, the tool to ensure that supplier spend is transparent and controlled.  


·        Incentivise: The tool of incentives is the next link to this around building a benefit for your colleagues to reduce their maverick supplier spend and focus on driving good business practice on thinking really actively before deciding to spend your money. Suppliers are vital for your business but having the same supplier doing the same think in different departments isn’t, unless you’ve specifically chosen to created something like a panel with transactional bidding. Speak to the supplier on this as your chosen and contracted suppliers should work with you to incentivise your staff. This does not have to be restricted to obvious providers like your travel provider, it can also be more fundemental suppliers to the core of what your business generates. Utlimately, it is of interest to them as it is for you to have more work come to them and in line reduce the maverick spend you have in your books. Some businesses we know have become even more creative with their maverick spend approach and incentivised their staff to increase their compliant spend in line with their performance and bonus. This may seem a step too far, particularly if suppliers only have a limited impact on your costs, but incentivising staff through both a reward and/or a reduction of their workload.

 


If you have finished this paper and are now wondering “How shall I tackle my own situation?”, the answer is start with one and max-out the benefits of that. This will give you the impetus to do some of others; you’ll have noticed that in some cases the recommendations are probably either / or, and there is a limit to how many quick wins you can get at once. If it still seems like impossibly hard work when you’re already flat out with your ”day job”, you can of course ask for external help.

Good luck!

 

 

Citations

(4)   https://tradingeconomics.com/united-states/business-confidence


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