This guide outlines ways in which your business can trim and streamline the costs for its procurement process. Sourcing and procurement are essential processes for most businesses, which require materials and goods to develop products for sale to customers. And, like all essential business processes, sourcing and procurement process matters do not occur for free.
Yet, many entrepreneurs neglect to consider the costs of procurement as they are developing their business models and strategies. To help improve the procurement processes, here are a few of the typical costs associated with procurement as well as best practices for reducing costs as much as possible.
Procurement process overview
In business, procurement is the act of acquiring goods and services. Companies can participate in procurement from both sides of the transaction, as buyers or sellers, but the procurement process is most often described as such by those businesses interested in making purchases. It is worth noting that purchasing is not the start and finish of procurement; though purchasing is an important step of the procurement process, it is not the only cost that procurement entails. To better plan for the expense of procurement, business leaders should consider the following types of costs involved in procurement.
Types of procurement process costs
Purchasing costs include the costs generated by the procurement team, which includes the purchasing and other indirect labor such as data entry, file management, collaboration with other departments and more. There is little a company can do to reduce purchasing costs, save keeping their procurement needs low and their purchasing teams small.
Contract and negotiation costs include costs associated with negotiating purchasing contracts, which are part of the cost of doing business. Costs increase with longer negotiations that require consultation with legal experts, so business leaders need to be cognizant that any optimal payment terms they secure through intense negotiation may be offset by the costs of labor to obtain those terms.
Taxes and customs costs are incurred through obtaining goods from foreign suppliers. Usually, companies need to rely on specialized staff with experience navigating tax and custom regulations. As with contract and negotiation costs, taxes and customs can be part of the cost of doing business, but business leaders should recognize that the cost benefits of doing business overseas may be outweighed by the taxes and fees incurred in the process.
Base costs are the prices paid for the goods and services procured. Many companies strive to reduce base costs through leveraging economies of scale and conducting strategic negotiations during the contract phase.
Transportation costs are the costs incurred through the acquisition of goods and services. Developing mutually beneficial relationships with carriers is a good way to keep these costs low. Business leaders might also consider locating suppliers geographically close to their target markets to cut shipping expenses.
Inventory brokerage costs are the expenses of outsourcing inventory management. Because inventory management is at once so critical to business success and so time-consuming and tedious, many organizations opt to utilize the expertise of third-party inventory management services. Businesses can almost entirely eliminate costs associated with inventory brokerage by assuming the responsibility in house.
Tips for reducing procurement costs
In addition to the strategies associated with specific costs as detailed above, there are a few ways that companies can keep procurement costs even lower, allowing for access to more working capital to grow their business. Some of the most widely applicable tips for eliminating wasteful spending related to procurement include:
Use Procurement Software
Software tools give business leaders and their procurement teams more visibility over the entire procurement process, which allows for greater insight into where procurement funding is going and how financial power might be optimized. Leaders and their teams might look into software tools like Procure to Pay, which streamlines processes and makes it faster and easier to achieve the goods and services the organization needs.
Prioritize Process Improvements
The more effective the procurement process, the less expense will be wasted on inefficiency and error. Working with the procurement team, business leaders should strive to identify areas in the procurement process that could be improved, such as by standardizing practices across the supply chain or utilizing certain KPIs to measure the performance of suppliers.
Employ Cost Avoidance
In addition to working to save money, business leaders should strive to avoid costs throughout the procurement process. For example, procurement teams might develop supplier relationships and use their skills to eliminate annual pricing increases, thereby avoiding that additional cost to procurement operations.
Like any essential business department, procurement and sourcing requires funding to operate. However, it is possible to keep the costs of procurement low, especially once business leaders understand how procurement spends their budget at present.
Photo by Karolina Grabowska
