Limitless cost reduction specialists 1540 international parkway ste. The study established that, procurement cost reduction strategy had greater influence on eprocurement performance in state parastatals in kenya. Procurement costs should be kept as minimal as possible, to ensure profits are as high as they can possibly be. Look across the whole organisation and differentiate the strategicallycritical good costs from the nonessential bad costs. This purchasing training course will focus on the methods, processes, and techniques that should be utilized to obtain real supply management savings. Strategic cost management in the supply chain procurement. The key supply chain challenge of cost reduction cost savings flow directly to the bottom line. Implementing best purchasing and supply management. The chart on the right shows exactly the savings that can be achieved. Implementing procurement efficiency cost reduction. According to deloittes 2016 global chief procurement officer cpo study, 74% of cpos are citing cost reduction as a strong business priority for the upcoming 12 months. In contrast to strategic goals, sourcing levers do not provide a general orientation for purchasing activities, such as achieving annual cost saving targets schiele et. A good way to start cutting cost is by conducting a spend analysis. Supplier cost reduction driving down procurement costs.
The key supply chain challenge of cost reduction logistics. A reduction in total supply chain leadtime will lead to. Even the threat of benchmarking can be enough to bring a vendor to the table to negotiate a reduction in fees. There are still a lot of advantages and benefits that a detailed and comprehensive procurement strategy plan can provide businesses and other entities with. It also revealed that, procurement cost reduction strategy has a direct relationship with e. Hosting negotiations with a supplier is rarely a process buyer look forward to. The methodology we propose is a version of value engineering ve and has been used successfully at hewlett packard compaq computer corp. A benchmarking right that will automatically reduce service charges in line with market pricing offers an easy way to realize cost savings. Procurement costs supplier management money saving tips. Understand the life cycle for it cost reduction ideas helps evaluate the probability of success of achieving the cost reduction targets. To do so, first the interrelation between purchasing power and purchasing strategies was conceptualized, based on the study of multiple buyers of vaccines for developing countries. But its not always that easy to get the vendors price down while maintaining the quality and service levels you need.
According to the deloitte 2016 global chief pr ocurement officer cpo study, 74% of cpos are focusing on cost reduction as a strong business priority. But, the great news is that by implementing the right cost reduction strategies, 70% companies can achieve anywhere from 5% to 20% in cost savings. Best practices for procurement savings consolidate vendors where possible. Strategic purchasing and supply management it might also provide a presentation of a coming. May 05, 2004 according to a study by the center for applied purchasing studies caps research, the primary goal of most purchasing executives is to reduce total costs 1.
Transforming purchasing into such a strategic function requires a longterm perspective aimed at building networks of competence people who can cross boundaries. Aug 30, 2017 here are three expert strategies to reduce costs in procurement and purchasing be bold negotiate. Discover the tools for knowing the costs your company should cut, without impacting its ability to deliver goods and services new from steve bragg, this book provides the tools for determining which costs a company should cut, without impacting its ability to deliver goods and services. Formatted costs of services institute for supply management. Costsaving strategies for contracts procurement cscmp. A cost reduction process is undertaken by companies to reduce their costs and increase their profitability and in some cases is necessary in order to remain competitive. Reducing the costs of purchased services institute for supply. Implementing best purchasing and supply management practices. Beyond cost reduction 5 the ideas presented in these pages have grown out of the boston consulting groups extensive work with the worlds leading automotive oems and suppliers, as well as a detailed analysis of global purchasing practices in the automotive industry. A revie w of the available literature revealed a number of strategies that organizations can use to reduce the cost. With typically thin net margins, in the 35 % range for many companies, making progress in gfr cost reduction is a logical place to focus. Still, the conceptualisation of sourcing levers in contemporary literature is relatively limited.
The pvm formula pvmvalue cost 1,2,3,4,5 pvm is calculated by taking the value created in each of the five components and subtracting the corresponding costs, as shown in. There is a cost base that many companies miss when looking for efficiencies. Understand what cost reduction activities you have taken and what additional strategies are available to you manage the lifecycle. We helped identify ways to dramatically reduce costs by overhauling our clients procurement practices, delivering rapid gains and sustainable performance.
Prices you agreed on years ago may be out of step with the market. Still, the conceptualisation of sourcing levers in. If net profit on sales is 5%, for example, a reduction in supply chain costs from 9% to 4% or from 12% to 7% will double net profits. Purchasing leaders have a culture of exploiting every opportunity to reduce their total cost of supply using a wellestablished category management process, where purchasing is recognized as a valuedriver by all business functions. A costeffective procurement process would help a large organization generate millions of dollars of savings every year. Strategies to reduce cost of procurement and purchasing. One key component is applying rigorous procurement methodologies.
Cost management programs need to be scoped as two to threeyear initiatives rather than as immediateterm efforts with oneyear horizons. Success in purchasing is dependent not only on an awareness of the potential opportunities, but more importantly, and the focus of this course, is the knowledgeable implementation of the methods, processes, and techniques that should be utilized in order to become a leader in obtaining real supply management savings through negotiations and. By adopting a pragmatic strategy that combines the best of both approaches, our experience is that distributors and wholesalers can reap substantial value. Costsaving strategies for contracts procurement cscmps. These strategies include volume aggregation, a commitment to supplier development, an integrated sourcing and procurement strategy to increase control over.
How to achieve a sustainable cost reduction in procurement. I agree, profit improvement is a better term and as i said in the article, really value is the key to what we should be doing. Strategic cost reduction through procurement pwc uk. Data can empower your negotiation capabilities get a 360 view of your suppliers. Cost efficiency, cost reduction, and spend analytics continue to be among the top business priorities in supply chain management scm and procurement. The cost of the program can typically be funded from the savings delivered. The three goals of strategic procurement purchasing practice. European journal of logistics, purchasing and supply chain management vol. Except for when it is plainly spelled out in a contract.
Of course, theres a big difference between making smart financial decisions and cutting corners. Achieving the full potential of 7% to 10% cost savings may take two to three years, but much can. Our experience suggests that combining the strategies and techniques used by some of the best retailers and manufacturers can reap substantial value. Here are 5 data strategies that can help reduce supplier spend, procurement and even logistics costs. A thorough analysis of an organisation spend will allow it to determine what it. Supply managers in general are under an increasing amount of pressure to assure the accuracy and validity of their cost reduction measures. Beyond cost reduction measuring how procurement creates business value by alex brown, kyle appell and meghan truchan.
A logical step in overall cost reduction strategies is to focus on purchased services. A better approach is to use the initial cost reduction program as an opportunity to build a competency in cost management rather than in mere cost reduction. Value cost value cost value cost value cost value cost 1. Strategic purchasing young procurement professionals.
The role of purchasing and supply in strategic cost management in the supply chain. This approach misses a significant strategic potential to add value to a company through the purchasing function by driving innovation and superior longterm cost performance. Sourcing tactics to achieve cost savings university of twente. To do so, first the interrelation between purchasing power and purchasing strategies was conceptualized, based on the study of multiple buyers of. Top performers integrate basic instruments, such as better spend. A product 360 view significantly reduces manual efforts and costs as it. If you want to write and develop an effective procurement strategy plan, make sure to use our downloadable examples in pdf as your references. The purchasing practice cost reduction solution provides a lowrisk answer to shortterm savings delivery without the negative impact of head count reduction or outsourcing. It explains how to use throughput analysis in order to locate bottleneck operations in a company, which in.
The company chooses an optimum mix of vendors who can provide the best. Procurement cost reduction strategies that companies need to know with the economic environment becoming increasingly complex, companies have been compelled to focus on procurement cost reduction initiatives rather than simply increasing profit margins. Supplier management is critical to maximizing your procurement savings. Best practices for procurement savings purchasecontrol.
Effective management of third party spend can on average release savings of between 712% and can have a direct impact on the bottom line. Jan 16, 2019 take a look at these seven cost reduction strategies procurement professionals use to reduce spending and maximize profit potential. Jan 21, 2014 this is a highly concentrated presentation that addresses the differences among price, cost, and tco. In addition many organisations fail to realise the cost saving potential because they do not link the spend analysis output to their strategic sourcing decisions. After an initial cost reduction program, a global energy component manufacturer was in search of additional savings to restore lagging profits.
Achieving the full potential of 7% to 10% cost savings may take two to three years, but much can be achieved in as little as five to six months. However, if you want your business to save money, you must be willing to discuss pricing with your suppliers to ensure maximum costefficiency and transparency. Because sometimes cost reduction is what procurement is asked to deliver particularly if there is a perceived crisis. Third party goods and services such as marketing, logistics, it, property and production costs can account for between 1525% of an organisations total cost base but are often not given the same level of attention as other cost lines such as payroll or cost of goods.