10 Procurement Cost Reduction Strategies to Optimize Your Bottom Line

Procurement has bigger concerns than savings. After all, the function has fought hard for its strategic seat. Now that it’s handling matters that determine the company’s direction, a focus on cost reduction strategies will only mark a return to cost cutter status, right?

While there’s no denying that Procurement can do more than manage spend, savings will never lose their value, especially at scale.

To keep you on Finance’s good side this year, this blog will explore several cost reduction levers that deliver savings without sacrificing Procurement’s strategic focus.

What’s the difference: cost reduction vs. cost cutting

While the terms cost reduction and cost cutting are often used interchangeably, they aren’t the same in practice. Cost cutting involves eliminating expenses for immediate savings. Cost reduction, on the other hand, involves finding ways to lower costs without eliminating them altogether.

Cost reduction strategies

Saving money is Procurement’s most basic goal, and there are many ways to achieve it. Below, we’ve listed nine cost reduction tactics and offered some considerations that may help you maximize their value.

Utilize reverse auctions

Played correctly, an auction is a great way to get people to pay maximum value for something. A reverse auction offers the inverse benefit. Reverse auctions are real-time e-sourcing events that pit select vendors against each other to win your business. Just like an auction, each vendor bids a price but in this scenario the competition drives the cost lower and lower until one wins out.

Reverse auctions can be a great way to secure beneficial pricing, but there are a few factors to consider:

• Is the quality of goods and services comparable across all participating vendors?
• Are there supply chain, third party, or performance risks associated with any of the participants?
• Are the vendors interested in competing over your business?

Since you will be in control of who joins the reverse auction, these are important questions to answer in the preparation phase. The last question is especially important because if your business isn’t particularly attractive to the participating vendors, a reverse auction can deadlock bids, leaving you with a higher price than you predicted or were already paying.

Negotiate longer payment terms

How quickly you pay for goods and services is often negotiable, and its benefits extend beyond simply pushing off invoice dates. Longer payment terms:

• Improve liquidity by giving the business more time to leverage cash
• Secure bulk discounts by giving the business more time to pay for larger orders
• Reduce financing costs by limiting how often cards have a balance that

First, longer payment terms allow the business to improve liquidity by leveraging its cash for longer periods of time. For example, 90-day payment terms give a business three-times as long to allocate and generate cash.

Longer payment terms can also help secure bulk discounts. Because the business has more time to pay, it can place larger orders in exchange for lower pricing. Be careful though: the cost of extra inventory storage can outweigh the benefits of bulk pricing.

Finally, longer payment terms can reduce financing costs by reducing how often a balance exists to accrue interest charges. For example, each order on 30-day terms will accrue interest monthly while orders on 90-day terms will only accrue interest once a quarter. Together, all of these benefits give Finance more strategic ways to use cash, which ultimately translates into business growth over time.

Implement an e-Procurement system

Even the most favorable payment terms won’t reduce costs in a business with no purchasing controls. Without fail, every business unit will work with a different supplier and pay a different price for each order. e-Procurement systems establish guardrails by digitizing purchasing channels and limiting what, how, and from whom the business can buy. E-Procurement systems also house PO details

However, it’s worth noting that starting digital transformation with an e-Procurement solution may not be the magic bullet to your savings goals. While tactical tools can bring your strategy to life, they work best when you have a strategy to implement first. But to build your strategy, you need to understand your spend first.

Conduct spend analysis

One reason that a strategic approach to procurement can be difficult is that many organizations have no way to see what they’re spending. As a result, they have massive pools of untapped savings opportunities that they don’t know exist. For any team looking to launch large-scale cost reduction initiatives, finding these opportunities must be priority one.

Outside of luck, the only way to find these opportunities is to centralize 100% of an organization’s spend data and organize it into categories and sub-categories. From there, you can analyze it in several ways:

• Business level – looking for trends, risk, non-compliance, and large-scale opportunities
• Category level – evaluating contracts, supplier redundancies, and opportunities for cost savings and cost avoidances
• Supplier level – exploring supplier spend, performance, and more beneficial vendor opportunities
• Business unit/location level – analyzing granular spend for focused efficiency improvements

The main benefit of a spend analysis is that it can give teams a comprehensive inventory of their spend reduction opportunities. It can also go beyond savings and highlight non-financial initiatives like ESG and third-party risk as well. However, all of this relies on the analysis being comprehensive, meaning it must include all spend data from all sources.

To learn why that’s easier than it seems, read our guide on realizing procurement AI value for spend management.

Start a supplier performance management program

Supplier relationship management (SRM) has become more symbiotic as economic uncertainty has forced businesses and their suppliers to keep each other afloat with mutually beneficial agreements. But a process-led approach to managing supplier performance still holds massive savings potential.

First, supplier performance management ensures that a vendor’s goods and services are worth the cost by meeting quality, delivery, and quantity standards regularly.

Consider buying from local suppliers

Shipping costs are the hidden tax in today’s supply chains. A single widget can travel across the world multiple times before making its way into your inventory. In that time, multiple tiers of your supply chain accrued the cost of transportation, packaging, labor, tariffs, and other prices. All of these ultimately trickle down into your supplier’s per unit price.

With the complexity of modern supply chains, much of this is unavoidable. But sourcing locally can reduce costs, especially at scale. If you can apply this approach to the nth tier of your supply chain by understanding who your suppliers buy from and so on, you may find opportunities to radically reduce the cost of a good or service.

Develop a contract management system

Contracts are one of Procurement’s most powerful and versatile tools for managing spend. But without a reliable way to manage them, contracts can introduce more problems than they solve. First, without a way to see all an organization’s contracts, expiration dates can go unnoticed. When that happens, organizations may be subject to price hikes if they can keep buying from the same supplier. Even worse, contract lapses can suddenly leave organizations with no coverage in key categories. In order to avert catastrophic disruptions, teams may need to source from new vendors at an expedited rate. That means higher shipping costs, less time to vet supply chain risk, and eroded trust with stakeholders.

Leverage economies of scale

A less glaring issue with contract management is redundant agreements. It’s common for companies without a centralized contract management system to have multiple conflicting agreements with a single supplier. Even worse, they may have contracts with multiple suppliers, which inflates spend and erodes supplier relationship management efforts long-term.

Companies in this position have a great opportunity to reduce costs by consolidating all of this spend under a single agreement in exchange for discounted pricing. Conceptually, this is the same as category-based contracts, but it leverages volume across categories to create even more negotiating power.

Some companies may even benefit from a relationship with a group purchasing organization (GPO). GPOs are sourcing companies that help large companies, especially private equity firms, leverage their economies of scale for push-button special pricing.

Implement a strategic sourcing process

The final approach to cost reduction is procurement strategic sourcing. Much of what we’ve already discussed, such as data-driven supplier selection, contract management, and spend analytics falls under the concept of strategic sourcing. But all of it works together most effectively when your procurement process revolves around strategic sourcing instead of tactical purchasing.

While the difference may seem conceptual, it matters in execution. Whereas tactical purchasing focuses on simply streamlining the flow of goods and services for the business, strategic sourcing focuses on building a supply chain that advances business goals. A strategic sourcing process is multi-dimensional, often trading immediate financial wins for non-financial advancements, and vice versa.

Of course, strategic sourcing still relies on tactics like extending payment terms and reducing cycle times. But these tactics may become secondary to those like:

• Innovation procurement
• Diversity
• Scope-3 emission reduction
• Third-party risk management
• Regulatory compliance
• Governance
• Corporate social responsibility

These strategies and tactics hold the power to take a business beyond best-in-class and turn it into a next-generation company with a considerable competitive advantage. While they may sometimes seem counterintuitive to a cost reduction plan, they often present immense financial opportunities in the future such as cost-optimized operations, investment opportunities, tax credit savings, etc. For this reason, strategic sourcing is the best cost reduction strategy at scale.

Optimize your procurement strategy

With so many cost reduction levers, it may seem impossible to use them all regularly. However, they’re all part of a mature procurement strategy. Teams that pick and choose tactics leave large swathes of value unclaimed.

The biggest challenge: spend visibility. Most organizations can’t see the big picture of their spend, so much of it goes unmanaged. SpendHQ removes this roadblock by using AI to consolidate and categorize 97% of your spend into an actionable sourcing framework.

But we don’t stop there. Unlike traditional spend analytics, SpendHQ pairs these insights with performance management to create a pipeline of Procurement’s opportunities, projects, and their results. With this single source of truth, leaders can oversee teams, teams can work effectively, and stakeholders can stay informed—just like a CRM for Procurement.

Together, these insights give Procurement access to every cost reduction lever and the operational efficiency to use them. The result isn’t just greater savings—it deepens Procurement’s organizational value. But don’t take it from us, explore our case studies to see the value of SpendHQ in their own words or schedule a one-on-one demo for a tailored walkthrough with one of our procurement veterans.