Almost every other organisation that you see today is aiming towards augmenting their revenue through increased sales. In the run for this augmentation, what the companies are overlooking is the fact that when their businesses are prospering and revenues are increasing at the same pace their costs are actually going too steep. Today, if a company lets costs increase at a relatively high rate compared to the income the profit margin will go on to be very sensitive to the ups and downs of demand.
To make matters worse, if the company undergoes recession, what follows would be merely turning the profit incurred into loss. The company would no longer be flexible to handle cost cutting and the eventual decrease in profits.
If you are a company owner and wish to keep your activities in-house or outsource, bear in mind that the total value which is produced by your company should be much more than your total costs. This particular tactic is the same as what is used by many companies for ascertaining which of their services or products are actually proving profitable to the company. Companies now also go on to analyse their total expenditure to determine which particular operation is actually sapping them off their profits and working as a big cost leech on the company.
You can decrease cost and expect to have a change in the bottom line as compared to augmented sales. Procurement cost of services and goods can ascertained through well though various procurement strategies. Given below are some procurement strategies that can help you in reducing costs:
- Target Costing: A task that is considered as a fatal mistake by many is the cost-driven pricing. Appropriate pricing of products and services is of paramount significance to every business.
- Value engineering: By far, it is a known fact that the best value is determined and its subsequent use in the procurement and enhancement of the process is investigated. Value engineering works on the basic premise of ascertaining the exact operational function of a service or product. It can help in not only enhancing production process and administrative processes but also enhance the product.
- Early Supplier Involvement (ESI): you would see this particular aspect at the product design stage. Here, you can opt to transfer your partnerships with the product development team and suppliers. When you involve the supplier at an earlier stage, it will be easier for the product development wing to release their performance specifications that are required from the supplier and using their proficiency in lowering costs.
- Negotiation: Negotiation is used as a common tool by the buyers, sellers for achieving their budget-constrained goals, and eventually reaching a common agreement, which would further enhance the basic skills of the procurement team.
- Purchase leverage: Various business units concentrate more on expanding their procurement than augment their bargaining power. By avoiding procurement, various business units in the company buy similar parts from the suppliers at variable prices. Moreover, they are also clueless about each other’s condition due to which they eventually start losing out on numerous procurement saving prospects.
- Price Cost Analysis: In order to understand the various elements of the cost structure, buyers usually use price and cost analysis as a basic tool. If at any point the cost structure is not comprehensible, the items for reasonable pricing too cannot be understood.
- Standardization: In this particular initiative standardized specifications for various projects, product, etc are reduced.
- Design for Purchase (DFP): Product design stages make use of stand processes and technologies used by third-party factory. Moreover, they also use various standard parts of the industry for assisting in effortlessness in acquiring raw materials. This reduces production cost as well technical support.
- Consortium Procurement: You would notice this particular task in case of non-profit business fields like health and education.
In spite of the strong connection between the profits incurred and the procurement performance, not almost all companies have placed procurement at the right level in the organisation. Companies should chance their outlook with regard to procurement and not term it as a mere operation-supporting function. In reality, procurement is a strategic function that has an effect on the overall success of the company.
You must understand that procurement has a direct impact on the financial results and profitability of every company. By merely maintaining sufficient sources of supply and concentrating on increased sales is inadequate if companies wish to be known as one of the successful players in the market. If you wish to keep a competitive edge, you must always stay conscious and think of how you can improve the operations and various projects you have taken up for improving your tomorrow. Make judicious decisions in case of your procurement costs and you will eventually increase profits.
Al Kraus is the Marketing Lead at Procurement Management & Solutions. Procurex plays a key role in ensuring manufacturing companies with overall profitability and growth. Take hold of cost management consulting that will deliver sustainable operational efficiencies and secure a competitive advantage for your company.