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Illustration by Milo Winter (1919) | Remember the fable “Belling the Cat”? A group of mice, tired of a murderous cat, decided to place a bell on it as a warning signal. While simple in theory, it was an arduous task to execute. This age-old story serves as a powerful analogy for procurement leaders today who strive to manage risks and achieve procurement cost savings. Just like the mice needed to bell the cat to keep their community safe, procurement professionals must identify, assess, and mitigate risks to protect their savings.

The Growing Scope of Procurement Cost Reduction

Procurement has evolved significantly over the years, growing beyond its traditional role of sourcing suppliers and managing supply chains. Today, procurement holds a much broader financial responsibility, directly impacting the bottom line of organizations. As the strategic importance of procurement continues to rise, achieving procurement cost savings is no longer just an operational goal—it’s a critical business imperative.

According to Zycus’ “Pulse of Procurement 2018” annual research report, 54% of procurement leaders prioritize procurement cost reduction as their primary focus. Whether your organization is dealing with shrinking budgets or increasing cost pressures, cost reduction play a pivotal role in sustaining profitability and driving growth.

Key Strategies for Procurement Cost Reduction

Cost-saving methods in procurement differ by spend categories. For instance, if the current category cost is known and the new price is lower, then the savings are apparent. However, when dealing with new products, services, or technologies where costs are not well-defined, companies must employ strategic approaches to capture both procurement cost savings and cost avoidance.

Here are 5 steps to identify and capture procurement cost reduction:

1. Mine Procurement Information

Begin by gathering all relevant procurement data. This involves collecting information from various sources, including purchase orders, invoice solution, supplier contracts, and market data. Comprehensive data mining helps identify spending patterns and uncovers areas where cost savings can be achieved.

2. Classify and Categorize Procurement Information

Once data is collected, it needs to be organized into specific categories. Proper classification enables a clear view of spend areas and highlights categories that may have been mismanaged in the past. Identifying areas of excess spending, such as too many suppliers or paying above benchmark prices, is crucial for realizing procurement cost savings.

3. Identify Opportunities for Savings

Analyze the categorized data to identify opportunities for cost savings. This could involve consolidating suppliers, negotiating better terms, or finding alternative sources for high-cost items. Opportunities often exist in categories that have been overlooked due to historical mismanagement.

4. Execute Identified Opportunities

After identifying potential savings, it’s time to act. Execute cost-saving measures such as renegotiating contracts, sourcing alternative suppliers, or implementing cost-reduction strategies. The goal is to transform identified opportunities into realized savings.

5. Calculate Your Savings

Finally, measure the impact of your actions. Use the formula below to quantify your procurement cost savings:

Cost Savings = (Baseline Price – New Price) x Estimated Quantity

Tracking savings helps validate the effectiveness of procurement strategies and demonstrates value to stakeholders.

Understanding Supplier-Related Risks to Procurement Cost Savings

While building savings is essential, safeguarding them from potential risks is equally critical. Supplier-related risks can severely impact procurement cost reduction if not properly managed. Below are some common supplier-related risks that procurement professionals need to be vigilant about:

Trade Finance Failures: A supplier’s inability to secure trade finance can lead to additional costs as organizations scramble to find new suppliers.
Compromised Quality: Poor-quality supplies can result in product recalls, negatively affecting sales and customer trust.
Supplier Performance Decline: Gradual declines in supplier performance management—whether in cost, service, or response time—can increase production and delivery overheads.
Support Failures: Suppliers unable to support new products or services can delay delivery schedules, directly impacting sales.
Sudden Price Increases: Unjustified price hikes or contract cancellations can lead to unexpected costs, harming procurement cost savings.
Lack of Transparency: Hidden supplier practices, such as environmental violations or sweatshop conditions, can result in legal expenses and reputational damage.
Data Security Breaches: Theft of sensitive data from suppliers can lead to significant financial and operational damage.

5 Steps to Mitigate Risks Affecting Procurement Cost Savings

To bell the risks that threaten procurement savings, organizations need to implement proactive risk management strategies. Here are five steps to manage and mitigate these risks effectively:

1. Cross-Functionality of Risk Management

Establish a cross-functional approach to risk management, involving key stakeholders from procurement, finance, compliance, and operations. This collaborative strategy helps ensure comprehensive risk assessment and response planning.

2. Align Risk Management Activities

Align risk management with procurement goals, especially those related to procurement savings. Consistent alignment ensures that risk mitigation efforts directly contribute to saving objectives.

3. Leverage Supply Chain Intelligence

Use advanced supply chain intelligence tools to monitor and analyze supplier performance, market trends, and potential risks. Data-driven insights enable timely decision-making and help safeguard procurement cost savings.

4. Risk Mitigation Preparedness and Contingency Planning

Develop robust contingency plans to address potential disruptions. From alternative sourcing strategies to crisis response protocols, preparedness is key to minimizing the impact of risks on procurement savings.

5. Track Progress of Changes Implemented and Benefits Realized

Regularly track and measure the effectiveness of risk management initiatives. Monitor the progress of implemented changes to ensure that they are delivering the intended benefits and contributing to procurement savings.

Conclusion

Just as the mice in the fable needed to bell the cat to protect themselves, procurement professionals must identify and manage risks to safeguard their savings. While achieving procurement cost reduction is critical, it requires a blend of strategic planning, cross-functional collaboration, and effective risk management. By following the steps outlined above, procurement leaders can drive significant cost reductions, enhance supplier relationships, and ensure long-term success. Remember, the right strategy and partner can transform your procurement function into a true powerhouse of savings and value creation.

In the pursuit of procurement cost reduction, it’s essential to stay vigilant, adaptable, and innovative. By belling the risks and seizing opportunities, procurement professionals can achieve impactful savings that resonate across the entire organization.

To learn more about how Zycus can help you implement data-driven, integrated, and intelligent request management, request a demo today.

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