Procurement 101

Five Critical Steps To Lowering Costs Of Purchases

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5 minute read

Written by

Majdi Sleimen

Five Critical Steps To Lowering Costs Of Purchases

Procurement objectives can be simple or complex; it really just depends on an organization's structure and business type. That being said, a common objective always seems to touch on the concept of lowering costs. This is because, at the end of the day, managers want the same thing: to continue purchasing their necessary goods and services at the lowest possible costs. In fact, a 2016 study by Deloitte noted that 74% of the CPOs who participated in the survey say that cost reduction is their no. 1 priority. If you've ever experienced challenges achieving this seemingly simple goal, please know that you're not alone. Continue reading for a few tips to effectively overcome this undesirable situation.

First, the concept that needs to be clarified in order to approach your procurement objectives is the differentiation between price and cost. If a lower price has been established, it's easy to conclude that this also means the total cost will be lower. However, don't be swayed by a false assumption! When buyers have access to a comparable view for multiple received quotes, the implications of price versus cost become quite obvious.

Let's imagine that you've invited your approved list of suppliers to bid on an order for a large shipment of lumber. You receive three different quotes for identical wood, so naturally you favor the lowest price. But wait! One quote indicates that extra shipping costs must be added due to location, while the second quote requires additional taxes to be taken into account for an interstate law. There is also an extra cost for packaging adjustments that had to be done to comply with certain shipping regulations must be added to the third quote. Once these three scenarios are calculated for TCO [Total Cost of Ownership], the quote that once appeared the lowest could actually be the highest and vice versa. Therefore, it's important to use tools that can help you in comparing TCOs, not just prices.

Next up, get in the habit of asking why a given price is so low! This question is typically eager to burst out of mouths as low prices instantly raise a red flag for a supplier's credibility. Most frequently, low prices involve variations in the quality, which one would think it's fair, but it's still something to keep in mind, especially if you're expecting the item to fulfill precise quality standards. For more information about strategies that can be used for avoiding the siren call of a low price, check out The Low-Cost Illusion: Don't Be Blinded By Misinformation.

So how does one secure a genuine low cost for a product or service? There are a few practical methods that have been proven to be useful.

  1. Economies of Scale: Companies can obtain discounts when purchasing from suppliers due to several factors, but buyer loyalty and the size of the order are typically the main reasons. Loyal buyers with large orders are a worthwhile investment for suppliers, so they're more likely to offer cost advantages for continued business.
  2. High-Quality Suppliers: Select the most qualified suppliers to ensure the products and services you purchase meet your pre-set standard. High-quality suppliers are also more likely to safeguard you against logistics issues caused by using unreliable transportation methods. Tools for continuous evaluations of suppliers' performance can be extremely helpful in maintaining high quality.
  3. Set SMART Goals: This popular acronym represents: Specific, Measurable, Attainable, Realistic/Relevant, and Timely objectives. SMART goals are a way to ensure that cost expectations are aligned with reality. For example, a law firm might set target costs for an order of 200 packages of 17" x 22" Bond copy paper based on a previous order at the same time of year under comparable market conditions. Product specifications and transaction details can be documented, ideally in an organized online database.
  4. Incentify Your Team: Reward employees within your organization who regularly meet or even exceed expectations. It's only natural that some individuals will have areas of improvement, so provide incentives for them to develop into consist strong performers. A motivated team means your organization has the compulsory power to negotiate the lowest possible cost for items being purchased.
  5. Embrace New Technology: Achieving lower costs require facilitative software - if an organization isn't allowing cutting-edge technology to do mundane, manual tasks for them, how can they expect to achieve competitive costs? Invaluable time and money will be wasted on basic tasks and poor communication. In order to avoid this kind of setback, implement software that works for you, not against you.

To be fair, although these methods have proven results, achieving lower costs can be harder than many people might think. Buyers are human, which means they are susceptible to the appeal of a low price. Not to mention, securing a truly low cost for goods/services involves a great deal of coordination among the team and some proactive decisions, something that is often easier said than done.

It's not ideal to end on a cautionary note, so here's what you should do: implement the above notes, and when it comes to note # 5 investigate affordable, intuitive procurement software that can provide the tools needed to help you realize the lowest costs.

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