Cost-Effective Procurement: A Strategy to Profit Maximisation

Procurement is about obtaining or purchasing goods or services, typically for business or personal use. However, there is a crucial aspect of procurement which has to do with the ability to purchase goods or services at the lowest possible price without sacrificing quality or quantity for the sole purpose of maximising profit and that is cost-effective procurement. Here, negotiation plays an active role in the achievement of this. Companies and businesses seek ways to cut costs and maximise profit to remain afloat. 

In this blog post, we will examine cost-effective procurement, it's importance, and the strategies for doing it right. 

Cost-Effective Procurement Defined

Cost-effective procurement is simply the acquisition of goods or services at the lowest total cost while still meeting all quality and value of the goods and services. It entails achieving the desired outcome at the lowest possible price. The resources used must align with the result for a procurement to be cost-effective.  

When a procurement process is cost-effective, organisations can build long-term relationships with suppliers or manufacturers, as the likelihood of getting another supplier willing to offer them goods at a lower price may be very small.

Strategies for Cost-Effective Procurement

Cost-effective procurement is all about cost savings made during a purchase or procurement process, and to achieve this, there must be adequate planning, long-run investment, and improved administrative and operational processes. Below are more strategies for cost-effective procurement. 

1. Contract review: It is essential to review your procurement contract with your manufacturer or supplier, especially when there has been a long-term relationship between the buyer and the supplier. Re-evaluate the terms and conditions of your purchase and look for ways to reduce the cost. Based on the length of your relationship with your supplier, there may be some upgrades or services that you are eligible for that are not in your contract, but a contract review will give you access to those. 

2. Request for discount: It is a good idea to openly ask your vendor for a discount or find out if you are eligible for a discount even as a first-time buyer, especially when the volume of goods to be purchased is large. Eligibility for a discount may require a status upgrade or contract renegotiation, but it will be beneficial in the long run. 

3. Avoid Maverick spending: Maverick spending breaks the rules of corporate procedure because they are unauthorised or unapproved, which, if not eliminated, will cut deep into the procurement budget and lead to significant waste and, in the worst-case scenario, fraud. To avoid this, every team member must be aware of the procurement and spending procedures so that ignorance will not be an excuse for using unapproved vendors, expensive purchases, and fraudulent activities. 

4.  Proper planning: Every stage of a procurement process should be well planned using correct data analysis, past events, forecast of future expectations, experience, and maximum use of administrative resources. This move enables you to avoid emergency procurement, which could be expensive because of procurement and transportation costs. 

5. Supplier/vendor review and change: Procurement managers must comprehensively review their suppliers and vendors and simultaneously conduct a comparative analysis between them and other suppliers that offer the same or similar services. You need to know when you are being cheated or spending more money than you ought to. It would help if you also changed your supplier or vendor. Working with fewer suppliers makes building a solid relationship with them easier, and this will always present an opportunity to save costs.

6. Review of procurement needs: Here, adequate inventory management is critical. Before procurement, it is necessary to look at the inventory to know what is available and what needs to be purchased. Ask questions like, have we overstocked goods? Have we been using everything we procured? Will the available items in storage be enough for a certain period? Do we need these items that we want to procure? An honest response to these questions will help streamline the procurement process and help save costs by cutting excess costs from your procurement process.

7. Review of order quality: Some procurement agents tend to go for lower-quality goods to save or purchase more at a lower cost, but going for top-quality goods with higher price tags could be a cost-saving mechanism as quality products will last longer and will not require changing for a very long time, which will help save costs. 

8. Enhanced supplier/vendor relationship management: Enhanced supplier relationship management will lead to better communication, more robust and lasting relationships, and even collaboration with your supplier. Business owners can leverage such relationships to get discounts, premium services, favourable contract negotiation, and smoother procurement experience. 

9. Use reverse auction technique: Reverse auctions are where suppliers submit their bids to compete against each other, and the lowest bid wins. A business can, therefore, make their procurement needs public knowledge and ask for bids and proposals from suppliers.

10. Adoption of e-procurement method: Incorporating modern technology into the supply chain industry has simplified and streamlined supply chain processes. Available e-procurement platforms will help save costs through better data insights, real-time tracking of goods and data, and optimised documentation and management, all contributing to cost savings.

By utilising cost-effective procurement strategies, businesses can streamline their procurement process and negotiate better with their suppliers, eliminating waste within the supply chain. 

Through cost-effective procurement strategies, businesses can enhance their visibility by building solid relationships with efficient suppliers, and businesses will better understand themselves by reviewing and re-evaluating their processes to understand where they need to cut costs. 

Adopting cost-effective procurement strategies will also help ensure that there are no stock-outs or that business capital is not tied down unnecessarily through enhanced inventory management and overall business efficiency.

Partnering with experienced procurement experts like SARA PROCUREMENT SERVICES LIMITED is an excellent way to optimise your procurement cost without sacrificing business efficiency and productivity.

Visit our physical office space at 3 Fatai Irawo Street, Ajao Estate, Airport Road, Lagos, Nigeria, or any of our warehouse touch point locations worldwide to learn more about us and utilise our services. 

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