Why Organizations Need to Focus on Procurement Efficiency? A Business Case

For many, procurement may seem to a routine activity in a business however it could be a strategic activity that can save tonnes of money for an organisation if done rightly. Procurement involves arranging supplies at the lowest-possible cost. It also involves monitoring the performance of the supplier, negotiation of agreements favourable to the organisation and maintaining a strong network of suppliers. 

Requiring a wide range of information, procurement process involves a lot of people and is dependent on continuous and effective communication. A well-informed and a well-coordinated procurement team can help find the right supplier with analyses, data and insights into what a company buys and how it buys. 

A sub-optimum procurement process, on the other hand, can be a waste for the organisational resources, impacting profitability in turn. As per industry estimates, purchasing costs form around 30-40 per cent of the total costs incurred by any company and it may go even higher in some cases. That means focussing on this single largest factor itself can result in considerable savings for an organization. 

As per Bain Research, companies can reduce their purchasing costs by an average of 8-12 per cent by optimizing their procurement processes. However, many businesses still see procurement as a non-strategic function. For procurement to earn the respect it deserves, and for the business to have greater savings, a collaborative partnership between core business and procurement functions should be made in order to make both accountable and lead them towards a common goal i.e. greater efficiency. For instance, regular updates from the procurement team to the business heads on the company’s spending will give a heads up to the company and allow it to make proactive and smarter decisions.

Also, mostly savings at the procurement stage are category costs like entertainment and travel expenses which are difficult to put in the finance books. Collaboration between finance and procurement team can help create systems designed to deliver real cash savings to the company’s management. 

The capacity to lock long-term savings should be enhanced as achieving savings on purchasing costs can’t be done on a regular basis. This needs a behavioural change across the entire company for which it needs to looks towards investment in tools and talent every year.

Procurement costs are a two-edged sword and can help in savings if supplier selection and price negotiations are done rightly. These are keys to help a company buy in a better manner. Compared to general service categories, companies often struggle in negotiating lower prices when it comes to customized procurement. Often a lot of time is wasted in finding out a suitable supplier. Establishing a central supplier directory and streamlining suppliers are significant for the company, in such scenarios. Transparency as well as efficiency in the overall management always helps a company in price reduction as well as more savings.

Sample this: By benchmarking the mark-ups and labour rates for suppliers, a global chemicals company managed to achieve a breakthrough by yielding $75 million in savings owing to renegotiation of labour contracts. And you can do it too!