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Moving Beyond Procurement Cost Savings to Driving Value

Procurement cost savings stand out as a critical lever in the pursuit of trimming down expenses without compromising on quality. However, the work of procurement goes beyond just delivering price reduction and cost reduction.

It’s not only about reducing expenses. We have the potential to enhance operational efficiency and drive wider business objectives.

This article will first of all guide you through the essentials of procurement cost savings. We’ll then take a look at how we can move beyond just purchase cost reduction. Driving added value that impacts a business’s top line, operational efficiency and brand equity can all fall within procurement’s influence.

Get ready to explore how we can break free of the “lowest price” reputation we’ve been stuck with for so long. Wouldn’t procurement be way more fulfilling if we were pivotal drivers of business value?


How to first identify procurement cost savings

Identifying procurement savings forms a crucial aspect of enhancing your business’s bottom line. This usually involves a mix of procurement savings calculation methodology, as well as more strategic analysis of a company’s spend.

Review Procurement Processes

Start by thoroughly reviewing your existing procurement processes. Look for inefficiencies such as manual data entry, lengthy approval cycles, or frequent errors in order processing. Streamlining these processes can yield immediate cost reductions and lay the groundwork for more substantial savings.

Analyse Spend Data

Whether you have a spend analytics tool, or are dependent on using a spreadsheet dump of your ERP data, you must first analyse spend data. This allows you to identify high-value areas where negotiations could lead to better terms, bulk purchase discounts, or more cost-effective suppliers. Focus on categories with large spend or those critical to your operation, as these often present the most significant opportunities for savings.

Implement a Procurement Savings Calculation Methodology

Utilize a robust procurement savings calculation methodology to quantify savings accurately. This involves comparing current spend against previous periods or benchmarks. Ensure you account for both direct savings, such as reduced purchase costs, and indirect savings like efficiency improvements or decreased waste.

Collaborate with Suppliers

Engaging with your suppliers can uncover additional savings opportunities. Negotiate more favorable terms or explore cost avoidance strategies, such as longer payment terms, that can positively impact your working capital. Aim for partnerships that offer mutual benefits, such as shared growth opportunities or innovation in product development.

Report and Measure Success

With a procurement cost savings template, track realized savings and report them to stakeholders. This not only highlights procurement’s contribution to financial performance but also supports continuous improvement by identifying successes and areas for further analysis.

In implementing these steps, you’ll clarify the impact of procurement activities on both top line value and bottom line savings. The ultimate guide to procurement cost savings involves a consistent, analytical approach tailored to your organisation’s specifics, allowing for the realization of procurement’s full potential in contributing to financial health.


What are the different types of procurement savings?

Price Reduction

Price reduction represents the most direct method to increase bottom line procurement cost savings. It involves negotiating lower prices for goods and services without compromising quality. Utilising a procurement savings tracker template in Excel or implementing a procurement savings calculation methodology helps in benchmarking current prices against market rates or past contracts. This approach ensures you’re securing the best possible deal, effectively reducing expenses and contributing to improved financial performance.

Cost Reduction

Cost reduction in procurement transcends mere price negotiations. It includes strategies like procurement cost reduction strategies, streamlining purchase processes, and enhancing efficiency across the procurement lifecycle. By adopting measures such as consolidating suppliers to achieve better rates and implementing lean procurement processes, you’re not only cutting immediate costs but also setting the stage for sustained financial benefits. A keen focus on operational efficiencies leads to realized cost savings. Cost reduction is then quantified and attributed directly to procurement activities.

Cost Avoidance

The concept of cost avoidance is about preemptive measures to prevent unnecessary expenses. The challenge is that these are not always reflected immediately in financial statements.

Cost avoidance in procurement includes actions like locking in prices before market price hikes, or extending lifecycles of assets. These strategies, part of a broader procurement savings methodology, aid in maintaining steady operational costs.

Although more challenging to quantify, a procurement cost savings template can assist in tracking these. Showcasing procurement’s role in avoiding potential cost increases is important to explain the wider business value we deliver.

Working Capital Improvements

Procurement plays a critical role in optimizing working capital, affecting both the company’s liquidity and its ability to invest in growth opportunities. Strategies such as extended payment terms with suppliers, optimizing inventory levels to reduce holding costs, and implementing efficient procurement systems contribute to working capital savings. These measures not only help in freeing up cash that can be used elsewhere in the business but also in enhancing the overall financial health of the company. Acknowledging procurement’s impact on working capital improvements allows CFOs and other executives to appreciate its value beyond mere cost savings, aligning procurement’s objectives with broader business goals for top-line value creation.


How do you measure cost savings in procurement?

Effectively measuring cost savings in procurement is crucial for enhancing financial performance and achieving business goals. This section breaks down the methodology and tools you can use to quantify your procurement savings effectively, providing a comprehensive overview of cost savings versus cost avoidance and how to document and report these savings accurately.

Cost Savings vs. Cost Avoidance in Procurement

Understanding the difference between cost savings and cost avoidance is essential for measuring procurement efficiency accurately.

Cost savings refer to actions that result in spending less than what was previously spent for the same quantity and quality of goods or services. Examples include negotiating lower prices with suppliers or finding cheaper alternatives that meet your specifications, resulting in direct, realized savings that positively impact your bottom line.

On the other hand, cost avoidance involves actions that prevent future increases in spending. It’s about preemptive measures that avoid costs that would have been incurred in the absence of such actions. These can include negotiating contracts that prevent price increases or optimizing the supply chain to avoid rushed shipping fees. While cost avoidance contributes to budget stability and operational efficiency, it doesn’t reduce your current spending. Rather, it maintains it against potential increases.

To track and report these savings accurately, you can use a procurement savings tracker. This tool helps document both realised savings and cost avoidance measures, providing a clear view of procurement’s contribution to financial performance.

When documenting procurement savings, it’s vital to delineate your cost savings and cost avoidance figures in your cost savings report. We can thus showcase procurement’s impact on working capital savings and the bottom line enhancements, without confusing our finance colleagues with any cost avoidance activities that they would categorise differently.

Distinguishing between cost savings and cost avoidance and accurately documenting these figures using a standardised procurement savings tracker and calculation methodology is essential. They ensure alignment with broader business objectives, positioning procurement as a key driver of both immediate financial gains and long-term strategic value.


Will CPOs evolve into Chief Value Officers?

As procurement’s role expands beyond traditional cost savings, Chief Procurement Officers (CPOs) are increasingly positioned to evolve into Chief Value Officers. This shift also recognises the top line value that procurement can drive through business partnering and supplier innovation.

Realised savings in procurement, which include not only direct cost reductions but also cost avoidance and working capital savings, capture a broader spectrum of procurement’s value.

Understanding the Shift from Cost to Value

Modern procurement practices go beyond just chasing price reductions and avoiding cost increases. Progressive Chief Procurement Officers should now seek to position their teams as broader contributors of value to the business.

Only then will Procurement be viewed as more of a profit centre rather than as an overhead.

Incorporating Soft Savings and Added Value

The journey to Chief Value Officer involves recognising both soft savings, transactional efficiency gains, and the strategic benefits of supplier relationships. These aspects can all contribute to an organisation’s top line growth through innovation, market adaptability, and enhanced product offerings.

By leveraging procurement category strategies with a focus on a value-based approach rather than just cost, CPOs play a crucial role in steering company strategy towards sustained, long-term value creation.

The Role of Technology and Innovation

Innovation in procurement processes and technology, such as the use of procurement performance management software, enables a more comprehensive view of savings and value generation. This allows for a more accurate depiction of both cost savings and the broader value delivered by procurement activities.

The evolution of CPOs into Chief Value Officers reflects procurement’s expanding impact on both the top and bottom lines. By focusing on both hard cost savings, soft savings, and the wider added value through business partnering and supplier innovation, procurement leaders are set to drive significant strategic benefits for their organisations.


Some non-financial, value driven procurement KPIs

We have to acknowledge that it’s the financial metrics that always provide the business case for a procurement team. However, understanding non-financial, soft procurement KPIs is essential for acknowledging the wider value that procurement delivers. These KPIs focus on areas that directly contribute to a business’s strategic goals.

While these may not conveniently translate to direct P&L-visible benefits, they are crucial for long-term success. Every forward-thinking business needs to be thinking about how Procurement teams can help to deliver these.

By focusing on the broader value procurement can bring, you’re not just saving money; you’re investing in your company’s future. Start viewing your procurement team as the strategic asset it truly is. You’ll soon see that they contribute significantly to your organisation’s long-term success.

Supplier Relationship Management (SRM)

Effective SRM is vital for leveraging supplier capabilities beyond just cost savings. It encompasses evaluating supplier performance, collaborative innovation, and fostering relationships that can lead to improved service levels, quality, and reliability. By prioritising SRM, you ensure a resilient and responsive supply chain, capable of adapting to changes and creating competitive advantages.

Procurement Process Efficiency to save employees’ time

Measuring the efficiency of your procurement processes is crucial. This can include the cycle time for purchase order processing, as well as the accuracy of procurement data. Procurement KPIs such as these highlight areas for improvement that can lead to faster decision-making, reduced errors, and improved compliance. These all ultimately enhance the overall operational effectiveness, but don’t directly impact a company’s P&L.

Sustainable Procurement Practices

Sustainable procurement practices have become a crucial aspect of corporate responsibility. Tracking the percentage of green procurements or the adherence to ethics and compliance in the supply chain are powerful KPIs. These practices not only reduce environmental impact but also mitigate risks and improve brand reputation, contributing to long-term business sustainability.

Innovation and Continuous Improvement

Capturing the contributions of procurement to innovation and continuous improvement involves monitoring KPIs related to the adoption of new procurement technologies, process improvements, and the implementation of best practices. It all leads to fostering an environment that encourages innovation. This drives more efficient operations, new product development opportunities, and ultimately a stronger competitive position in the market.

Recognising these non-financial soft procurement KPIs is the key for CPOs to operate as Chief Value Officers. CFOs must appreciate the broader spectrum of procurement’s contribution beyond mere cost savings. It underscores procurement’s role as a strategic partner in driving organisational value and long-term growth.