The Importance of Looking Beyond Cost Savings in Procurement
By Mackenzie Oakley | December 7, 2021
Procurement’s main goal is to find cost savings but sourcing professionals may face challenges when it comes to convincing others that they can add a lot more value to the business than their primary task of cost reduction.
Old-school CPOs, business stakeholders, and senior leaders such as the CFO can severely hinder a procurement professional’s ability to do their job properly by insisting upon a narrow focus on cost.
What's wrong with focusing only on cost savings in procurement?
Keeping costs down isn’t the only thing that matters within an organization. Focusing only on cost savings is procurement at its most basic level and, frankly, if your only job is to find or negotiate the lowest possible price, then your job could very easily be automated.
Focusing solely on cost creates the following problems:
- The cost versus quality conundrum: You get what you pay for. Every purchasing decision involves a compromise between cost versus quality, but as any consumer will tell you, choosing the lowest-priced option can be more expensive in the long term if the product is faulty or the service is poor.
- There’s only so much cost you can take out: Procurement managers often refer to the “low hanging fruit” – those easy-to-find savings opportunities that can be identified through basic category analysis. But as the category matures, those savings can be harder to find without harming your suppliers.
- Supplier relationships: Any procurement professional could cut costs by ambushing their suppliers with a demand for lower prices. This might be an effective tactic in the short-term, but will damage your relationship with suppliers over time. This means missing out on the benefits of a long-term relationship such as being a preferred customer and having first access to supplier-led innovation.
Looking beyond cost savings in procurement
Here are seven additional areas Sourcing Heroes can focus on when they look beyond cost.
Risk
Choosing the cheapest supplier may be a risky decision – perhaps they are unreliable in terms of delivery, or their products are faulty. In a category where reliability and quality are critical, it may make sense to lower your risk exposure by choosing a more expensive option.
Quality
Some brands, say, a high-end chocolate company, stake their business on a reputation for quality. Higher sourcing costs can be outweighed by a higher price point for the end product.
Local Sourcing
One of the incredible things about globalization is that it’s often cheaper to source something from a factory on the other side of the planet than it is to buy it from a local manufacturer in the same town as your business.
However, choosing to source locally has benefits including a lower exposure to supply chain risk, and an improved social license to operate for your organization.
Supplier Diversity
Putting all of your eggs in one basket is never recommended, which is why it’s important to have back-up suppliers in geographically diverse areas in case of supply chain disruption. While it can be tempting to consolidate sourcing to a single, low-cost supplier, this can be a risky cost-reduction strategy.
Social Procurement
Sustainable Procurement
Sustainability is not only good for the planet, but it can be good for business. With customers demanding increased transparency around factors such as carbon emissions, palm oil, and water usage, sustainable procurement can help protect the organization from a consumer backlash.
Total Cost of Ownership (TOC)
TCO is about looking beyond immediate costs to understand the long-term costs of a purchasing decision. If you have chosen to source a product from the lowest-cost supplier, what will it cost you over its entire lifespan? This means factoring in maintenance and repair, ongoing support, future upgrades, employee training, and sometimes even disposal costs at the end of the product’s life.
Search for ways you can expand the value you bring to your organization by looking beyond cost reduction. Start by educating others on the value of focusing beyond costs, and build a business case for the alternative foci outlined above.
If you feel you simply don’t have the time or capacity to expand your focus, consider outsourcing the job of cost-reduction to a group purchasing organization. GPOs like Una can save members an average of 22% through pre-negotiated contracts and the power of group purchasing.
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