By Expense Reduction Analysts
Most companies want to achieve the best deal they can from their suppliers. But this can be a challenge. Organizations often have multiple suppliers with multiple ordering points. Additionally, employees may have limited purchasing experience and limited bandwidth for procurement responsibilities, given their other obligations associated with their roles.
Yet, successful cost-reduction efforts require your staff to play both offense and defense in their purchasing efforts. Assertively searching for cost-reduction opportunities can go well beyond negotiating supplier contracts. Also, once savings are achieved, you must proactively protect your savings to maintain your cost-reduction efforts over the long term.
Here are methods you can use to not only secure savings but maintain savings over time.
Going on the offensive
The following methods can help you to set the foundation to find cost-savings within your purchasing practices.
Set organization-wide cost reduction initiatives
One of the first steps to securing additional savings within your supplier base is to make sure cost-reduction efforts are communicated and practiced throughout your organization. Gather key staff members and stakeholders to outline the organization’s cost-reduction goals (for example, the organization needs $ to allow us to fund X initiative, which will benefit us as follows ….) and to gain their buy-in on the actionable steps that can be achieved in their respective departments. Actionable steps that staff can take on include conducting a spending assessment of each department, reviewing current supplier contracts, etc.
Give suppliers incentive to improve pricing
Once a spending assessment has been completed and you have a greater understanding of your organization’s annual spend and each department’s purchasing needs, you can outline your requirements in greater detail. If you can give suppliers greater detail and insight into your organization’s purchasing needs, they’ll likely give you better pricing because the additional context gives them a better sense of their margins and reduces their risk. You also can get better pricing by aggregating your purchasing (such as combining office supply orders from multiple departments), which may qualify you for better pricing based on order volume.
Create competitive tension
If you’ve been working with the same supplier for many years, you’ve probably developed a trusted relationship with them. Sometimes, this trust can lead to price creep. This can be avoided if you regularly send out RFPs to suppliers when contracts are set to expire. Explain to your current supplier that you will be considering additional offers when their contract ends. This practice creates competitive tension and could make your current supplier more apt to provide competitive offers and pricing to keep your business.
Maintain your defense
Once you’ve started implementing methods to retain quality service and improve supplier pricing, your next step is to ensure that savings are sustainable over time. The following methods can help you do so.
Know your supplier’s industry
It’s important to become knowledgeable about what is happening in your supplier’s world. Industry changes can have a significant impact on the rates you are charged for services. If you are already aware of changes that could affect your pricing, you may be able to negotiate a more favorable rate ahead of any increases. Additionally, if a particular industry is advancing quickly, you can use this knowledge to your advantage to make sure that the services you’re receiving within the scope of your current contract are on par with industry standards.
Make sure employees are adhering to contracts
When employees are placing orders, make sure they are purchasing items that are included in a supplier’s “list less” pricing which contributes to overall savings. Also explain any additional components that are included in a supplier contract, such as rebates or bonuses based on volume commitments.
Assess KPIs to sustain savings
Monitor key performance indicators (KPIs) throughout the term of the contract. This will help you to identify any changes and the driving factors behind those changes. This will allow you to make any necessary adjustments and ensure savings are realized on a sustained basis.
By continuing to monitor your organization’s cost-savings efforts over time, you will reduce the chance for price creep. Savings will be retained, and you’ll be able to put it towards organizational initiatives for years to come.