Uncovering Hidden Procurement Savings
By understanding procurement savings and how to identify them in your organization, you can significantly bolster financial performance. This blog explores some of the essential strategies for finding savings, how to calculate them, and how you can align your procurement and finance teams for maximum results.
Understanding Procurement Savings and Why They’re Essential for Your Business
In the most basic sense, procurement savings refer to lowering the cost of purchased goods and services. However, responsible procurement teams are strategic in their approach and focus just as much on cost avoidance and value maximization.
Realized procurement savings come from negotiating better deals, improving purchasing efficiency, streamlining processes, reducing waste, controlling maverick spend, and centralizing expenses. Ultimately, every dollar saved through procurement efforts flows straight to your bottom line.
While outright cost-cutting tends to provide only short-term savings, leveraging strategic sourcing and effective spend management can unlock recurring year-over-year savings and value. This may include both direct cost savings as well as longer-term indirect savings from improving cash flow, reducing risks, and forming strategic supplier relationships.
Procurement Savings vs. Cost Cutting
Cost cutting refers to abrupt, reactionary spending reductions like layoffs, budget cuts, foregoing maintenance, penalties from late payments, and stopping investments in growth. While sometimes necessary as a short-term fix, cost cutting often backfires long-term when it eats into future revenue and profits.
On the other hand, procurement savings stem from process improvements, responsible negotiating, waste reduction, and finding opportunities to add value. The goal is to lower costs in a strategic, sustainable manner without reducing quality or increasing risks.
Differentiating Between Visible and Hidden Procurement Savings
Procurement savings generally fall into two categories – visible (or hard) savings and hidden (or soft) savings. Visible savings are tangible reductions directly reflected in the bottom line, like lower per-unit costs.
Hidden savings are less obvious but still improve the bottom line indirectly, like reducing risks, improving cash flow, forming strategic supplier relationships, and avoiding future costs. Tracking both types of savings is key for calculating total procurement cost reductions.
For example, negotiating 60- instead of 30-day payment terms doesn’t directly reduce costs but accelerates cash flow, improves supplier relations, and avoids late fees. Hidden savings like this are easily overlooked without a rigorous procurement savings tracking process.
8 Strategies to Finding Hidden Procurement Savings
1. Negotiate Better Payment Terms and Enhance Supplier Relationships
By building strong relationships with suppliers through improved communication and collaboration, buyers can negotiate extended payment terms that enhance cash flow while deepening trust on both sides. Maintaining open channels enables further cost optimization over time. Strategic partnerships lead to favorable pricing and preference during negotiations. While regularly evaluating payment terms, a holistic procurement strategy recognizes that loyal buyers who support suppliers with early payments or temporary discounts in tough times reap significant hidden savings through strengthened interdependence and mutually beneficial supplier relationships.
2. Bundle Your Spend
Consolidating a company’s spend under fewer larger contracts lets suppliers offer better rates thanks to economies of scale. This bundling leads to volume discounts and lower per-unit costs.
For example, a company might purchase all its office supplies under one contract vs. having multiple vendors and contracts. Suppliers are willing to drastically lower rates to win all of that bundled business in one swoop.
Regularly analyze total category spend and identify opportunities to negotiate master service agreements. The savings can be massive with minimal effort.
3. Regularly Evaluate Your Suppliers
It’s easy for long-term contracts to become outdated as supplier rates increase, new players enter the market, and your needs change. Set reminders to regularly reassess suppliers even before contracts expire.
Run competitive bidding processes and negotiate new contracts for the same goods/services. Changing market conditions and new suppliers might allow substantial rate reductions for the same items.
Don’t get complacent. Aim to lower costs by at least 3-5% annually through renegotiation alone. Just because you’ve always used a supplier doesn’t mean you still should.
4. Consolidate and Centralize Data
With procurement data siloed across teams and facilities, it’s impossible to get a clear picture of total spending. Centralizing this data is step one for maximizing procurement savings.
Implement a unified e-procurement system accessible to all. This spend visibility makes it possible to identify redundancies, monitor budget vs. actuals, and guide better buying decisions.
It also provides leverage with existing suppliers when negotiating new rates. Data illuminates exactly what is being overpaid for. Consolidation enables significant yet hidden cost savings.
5. Implement Cost Analysis and Spend Analysis
Understanding where money is being spent is equally as important as how much. Cost and spend analysis provides this granular visibility, unlocking major savings opportunities.
Analyze expenses across each spend category – where is the most money going? Then, drill down by facility, department, item type, supplier, etc. This highlights redundancies, waste, and chances to consolidate spend.
Making data-driven decisions allows strategically reducing the highest spend categories first for maximum impact. You can’t reduce what you don’t understand or track.
6. Reduce Maverick Spend
Maverick spend refers to off-contract, unauthorized spending outside of procurement’s visibility. This results in paying higher rates vs using pre-negotiated contracts.
Implement purchase order requirements and approval workflows. This spending compliance ensures employees utilize preferred suppliers with lower contracted rates.
Savings leak out through maverick spend. Stopping it often reveals significant hidden savings. Procurement’s job is to guide informed buying, not restrict necessary expenses.
7. Reduce Waste and Supply Risks
Avoiding waste provides indirect savings by reducing the need for certain purchases altogether. Steps like monitoring product expiration, managing inventory, and streamlining assortment all lower procurement costs.
Reducing supply chain risk also unlocks major savings by preventing stockouts, production stoppages, and costly last-minute purchases from secondary suppliers.
Procurement should analyze product usage data and forecast demand for the right-size inventory. Cutting unnecessary supplies and allowing flexibility in sourcing generates substantial savings.
8. Acquire and Apply Procurement Technology
The right procurement software unlocks massive hidden savings by centralizing data, automating workflows, reducing maverick spend, and enabling advanced analytics.
Cloud-based e-procurement platforms provide real-time visibility into all spending and suppliers. This enables centralized e-sourcing, contract management, and guided buying.
Technology provides actionable insights to optimize costs, cash flow, risks, and compliance. The ROI is exponential yet overlooked savings compared to manual procurement processes.
Looking for more ways to reduce costs and find procurement savings? Explore our blog for eight more tips on unlocking hidden savings before the year ends.
How to Calculate Procurement Savings
Calculating procurement savings accurately is crucial for demonstrating the value that procurement brings to an organization. However, it can be challenging to calculate savings in a consistent, standardized way across different spend categories and suppliers.
- Here are some tips for calculating procurement savings:
- Track savings at the most granular level possible – by SKU, service, or contract line item. This allows for more precise savings calculations compared to tracking at a category or supplier level.
- Use a savings calculation methodology that separates one-time vs recurring savings. One-time savings from an ad-hoc price reduction should not be extrapolated over time.
- Factor in the total cost of ownership, not just purchase price. Include all costs like freight, duty, installation, training, maintenance, etc.
- Calculate savings over the full term of the agreement to account for price escalations or reductions built into contract terms.
- Track both hard dollar and soft dollar savings. Hard savings are actual reductions in spend, while soft savings are cost avoidances from optimizing processes.
- Use baselines tied to facts like previous contract rates or should-cost models to substantiate savings claims.
- Leverage procurement software and reporting tools to consistently track savings across spend areas, suppliers, contracts, product families, etc.
Bridging the Gap Between Finance and Procurement Departments
While procurement and finance functions may seem closely aligned, there can often be disconnects between the two teams that undermine collaboration and savings tracking.
Here are some tips for improving alignment between procurement and finance so that you can continually improve your bottom line:
- Establish standardized savings methodologies and reporting tools used by both groups to enable consistency.
- Schedule regular meetings between procurement and finance leaders to discuss spend analyses, forecasts, targets, and performance.
- Develop integrated tech platforms and dashboards that provide cross-functional visibility on spend and savings data.
- Involve procurement early in budgeting and planning processes to align on goals and timelines.
- Create joint incentive programs that reward both groups for hitting shared savings targets.
- Conduct training for both teams on processes and systems to improve understanding of each other’s roles.
- Identify pilot projects such as an e-invoicing rollout to demonstrate the power of collaborative efforts.
- Foster informal gatherings and networking opportunities to strengthen interdepartmental relationships.
Piece Together the Procurement Savings Puzzle With Velocity Procurement
As you navigate the intricate landscape of procurement savings, Velocity Procurement stands ready to be your strategic partner in looking for hidden opportunities for financial enhancement. By leveraging our expertise, advanced procurement technology, and proven methodologies, you can streamline processes, negotiate better deals, and realize both visible and hidden savings.
Don’t navigate the procurement journey alone—partner with Velocity Procurement for unparalleled support, collaborative solutions, and a roadmap to sustained financial success. Contact us today, and let’s embark on a journey to optimize your procurement processes and maximize your bottom line.