Procurement Cost Reductions Maxed Out?

You’ve Reduced Costs To A Bare Minimum – Now What?

PurchTips Edition #341 Click here for the printer-friendly version

Picture of Charles Dominick, SPSM, SPSM2, SPSM3, author of this procurement article on procurement cost reductions.By Charles Dominick, SPSM, SPSM2, SPSM3

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When it comes to procurement cost reductions, it is possible to get near a point where further cost reductions just aren’t possible. Prices just won’t be able to be compressed much, if any, further.

In a profession that still measures its biggest contribution to corporate success via cost savings calculations, this can be disturbing. After all, if you’ve done such a great job at getting costs down to a minimum through your work in previous years, a year with no new cost reductions might make you look suddenly ineffective.

Well, if you’re fortunate enough to reach this point, you shouldn’t look bad. And you shouldn’t continue using less mature approaches for a more mature function. Here are two ways you should change your procurement approach if you’ve maxed out your cost reductions:

  1. Change your measurements. When measuring procurement cost reduction, you compare a new, efficient price with an old, inefficient price. But, if after years of work, you’ve proven that your current price is optimally efficient, you should place more emphasis on benchmarking your prices (or the percentage change in your prices) with an index for each major category of goods or services you buy. Cost reduction demonstrates how much better you’re doing than how you used to do. Market benchmarking demonstrates how much better you’re doing than the rest of the world.
  2. Focus on supporting revenue growth. When you’re focused on cost reduction, you’re focused on increasing the profit on a stagnant amount of sales. Instead of that focus, immerse yourself in the vision that senior management has for growing revenue. It might be by improving quality. Or increasing speed to market. Or by introducing a new product or service or applying innovation to an existing one. Regardless, procurement and the supply base can contribute tremendously to these methods by adjusting its focus away from cost and onto these other things.

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Copyright 2015. This article is the property of the Next Level Purchasing Association and may not be copied or republished in any form without the express written consent of the Next Level Purchasing Association. Click here to request republishing permission.

By Charles Dominick, SPSM, SPSM2, SPSM3

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