Cost containment has always been a top priority for procurement leaders. In recent years, as procurement’s role within the business has become more strategic, expectations that chief procurement officers (CPOs) reduce outgoings while also increasing resilience, championing sustainability, and driving digital transformation have grown.
As a result, cost containment increasingly feels like a balancing act between multiple competing strategic goals. Finding ways to bring down costs while executing strategic objectives and dealing with an increasingly complex and unforgiving procurement landscape is what separates successful CPOs from those in danger of being left behind. Increasingly, economic anxieties dominate the conversation. Business leaders in 2024 are primarily worried about inflation, interest rates, and the risk of a global recession. Almost half of executives (46%) expect labour and skill shortages to disrupt business during the year ahead.
As a result, cost containment is once again on top of (but not dominating) CPOs’ priorities lists. Research from the Hackett Group found that cost containment has replaced supply chain continuity as CPOs’ number one goal in early 2024.
Here are three ways for CPOs to reduce costs without sacrificing their ability to be strategic.
1. Bundle spend with competitive suppliers
The benefits of bundling your spending with a select group of competitive suppliers extend beyond mere cost savings. When you consolidate your procurement with fewer suppliers, you streamline the purchasing process. This reduces both complexity and time spent performing routine tasks.
Consolidating orders also provides the opportunity to negotiate improved terms for your organisations that go beyond price. These can include favourable payment terms or more convenient delivery schedules.
If your organisation works with 10 or more different suppliers, each offering a similar product, your annual spending can be significantly reduced by consolidating your orders with 2-4 suppliers instead. This can significantly cut down on administrative load. Not only this, but reducing your number of suppliers can also reduce purchasing costs and put you in a better position to negotiate lower prices due to ordering in bulk. Be careful, however: overdependence on too few suppliers can leave your organisation open to disruption. As always in procurement, finding the right balance is the key.
2. Evaluate and review uncompetitive suppliers
As a continuation of the previous point, accurately evaluating which suppliers to keep working with and which ones to replace is a vital step in reducing costs.
When you benchmark your existing contracts, it can often reveal suppliers in your database that aren’t offering competitive rates, or are otherwise underperforming. You can engage with these suppliers to negotiate better prices in line with market standards. If they’re unwilling to adjust their pricing, you can reallocate your spending to more competitive suppliers.
3. Eliminate dark purchasing
Maverick spending, or dark purchasing, refers to procurement that takes place outside of existing contracts. If left unchecked, dark purchasing can drive up spending without procurement’s knowledge, or ability to do anything about it.
By creating a more centralised procure-to-pay process and implementing better oversight and approval procedures, you can eliminate a large amount of dark purchasing. However, maverick spending is often as much a cultural issue as an organisational one, and communicating effectively with other stakeholders is vital. Procurement shouldn’t approach these scenarios as an enforcer, necessarily, but rather as an enabler. If you can figure out why spending is happening outside the procurement function, you can potentially create official mechanisms that remove the impetus for maverick spending.
