8 ways procurement can radically reduce costs

Procurement-managed expenditure accounts for an average of 65-75% of many organisations’

outflows. Tough economic situations, therefore, require procurement professionals to continually
implement and manage cost reduction programmes.
As many organisations continue to search for ways to reduce costs, there should be an
agreed and well-defined programme for and by supply chain professionals to cut
costs. Gibson Sibanda (MCIPS), general secretary of CIPS Zimbabwe branch, outlines eight
initiatives and contributions that procurement practitioners can adopt to reduce and contain
costs, in this month’s SmartProcurement.
1. Challenge specifications or designs – Specifications are the detailed statement of needs
by the user. In many instances this is not thoroughly nor systematically analysed. Experience
shows that users tend to draw up specifications with a supplier in mind, hence they give little
consideration to alternatives.
There are two approaches to specifications: 
Conformance specifications lay down clear and unambiguous requirements. They detail the
product required and not the application, restrict innovation, are technical in nature and are not
negotiable.
Performance specifications provide a clear indication of the function, application, and
performance expected. Such specifications are outcomes oriented and the supplier must offer
an appropriate product. Performance specifications allow for increased competition by
enabling suppliers to suggest new or improved ways of meeting the expected performance.
A conformance specification leads to a certain brand preference, whereas a performance
specification overlooks the brand. In a drive to reduce procurement costs, performance
specifications give wide room for alternatives and allow for early supplier involvement.
Furthermore, they allow the use of concurrent engineering, implementation of ‘design for lean’,
use of a value analysis methodology and facilitate easy adoption of the 80/20 cost rule
analysis.
2. Challenge existing contracts for price competitiveness – Contracts that have existed
for a long time offer another cost-reduction avenue.
Reviewing contracts from five years ago should offer some savings opportunities. The
economic situation at the time the contract was drawn up could be different: consumption
patterns would likely have changed, volatile market conditions could have stabilised or
currencies could have become unstable.
During a review of existing contracts it is important to benchmark the market through thorough
research. When challenging existing contracts for competitiveness, there is a need to
establish cost drivers and tailor-make or target your negotiations to high-impact cost drivers.
3. Adopt standardisation – Reducing variety helps to reduce the amount of inventory. If an
organisation supplies a single brand of vehicles then it can keep a minimum of stock items as
opposed to an organisation with 5 brands of vehicles. Spares compatibility will mean that the
firm with a single brand will only stock spares used by many vehicles, keeping stock-holding
costs at low levels. Furthermore, economies of scale can be easily achieved during the
sourcing process and supplier relationship management can be improved.
4. Challenge supply chain costs – Carrying out supply chain mapping is very important in
determining costs at every stage of the supply chain.
Organisations sourcing from abroad must scrutinise the implication of Incoterms as the
improper acceptance and use of wrong Incoterms will only add costs to the supply chain.
Instead of paying insurance for every shipment through CIF, why not have a blanket insurance
for all the annual shipments? Also, consider carrying out a value analysis on the packaging
costs.
Furthermore, procurement planning helps reduce costs by ensuring the use of effective and
efficient modes of transport. Poor procurement planning leads to emergency procurements
requiring fast and expensive modes of transport and increasing costs.
5. Eradication of uncompetitive suppliers
Sustainable cost-reduction initiatives come from your suppliers as they have the best
knowledge of the cost drivers.

 In some cases competitive tendering helps to find new and competitive suppliers, while
single sourcing can provide the benefits of economies of scale.
 Cost cutting and containment opportunities should be communicated to suppliers. Those
suppliers who do not take steps to reduce costs should be removed from your database.
 A review of the existing sourcing policy helps identify opportunities. Challenging the
current sourcing strategy and carrying out cost benefit analysis is a good practice.

6. Consider outsourcing – Outsourcing is a management strategy through which non-core

activities or functions are transferred to specialist, efficient, external providers. The three steps
of outsourcing are to (1) select non-core activities, (2) conduct a market test and (3) set sights
high. When making outsourcing decisions, the total cost of ownership takes centre stage.
The most popular outsourced services in Zimbabwe’s manufacturing sector are security,
canteen services and some transportation and distribution services. The major non-core
functions in the manufacturing sector by value are transportation and distribution.
7. Make better use of working capital – Procurement professionals play a role in managing
an organisation’s working capital. Properly negotiated payment terms will go a long way in
ensuring a firm’s viability. At a bare minimum, advance payment systems should be avoided
(unless it is part of a supplier development practice). Managing working capital through
reducing inventory helps to contain costs. In manufacturing organisations, adopting build-to-
order systems as opposed to make-to-stock has a great affect on costs.
8. Centralise procurement – A centralised procurement function facilitates proper
expenditure analysis. In a devolved procurement structure, duplication of purchases is high,
opportunity areas become hidden and economies of scale are difficult to make use of.
The rationalised supplier base under a centralised procurement strategy leads to increased
competition among suppliers and reduced supply costs. It also helps in strategic supplier
relationship management.
In a centralised environment staffing requirements are reduced, category management
expertise is created and procurement segmentation can facilitate proper formulation of a clear
category sourcing strategy.
Niladri Nath Bhattacharjee Niladri has over 18 years of experience of which about 6 years have
been with KPMG. He has been instrumental in building the mining practice of KPMG and
currently leads the mining team within Infrastructure/ ENR practice of KPMG in India. He has
worked on strategy and operations consulting projects in various sectors with focus on
industrial and consumer markets before taking this role. Before KPMG, Niladri worked with the
supply chain practice in Accenture, MCIM (now called Accenture Strategy) focused on
assignments in the Resources Operating Group (covering Natural Resources and Metals) He has
executed and/ or lead over 60 assignments in various sectors, including over 30 assignments
with metals and mining companies He leads the KPMG relationship with Ministry of Steel,
Ministry of Coal and Ministry of Mines; He is also deeply connected in the sector with leading
sector PSUs and private sector organizations He has experience of working in India, China, USA,
Japan, South Africa, Malaysia and Russia Iron Ore Mining Company: Review of pricing strategy
for India domestic market based on change in global and domestic demand supply condition
and various other price determinants. State Mineral Development Corporation JV with O&G
upstream player for establishing a barytes beneficiation plant Selection of MDO for 5 mines of a
state mineral development corporation Diversification strategy for a profitable sponge iron
player interested in infra and minerals market MDO market assessment for an Indian
manufacturing cum mining major in India interested in exploring the market Assistance with
regard to coal block auction for an aluminum player regarding extended Schedule III mine
auctions Revenue maximization initiative for a state mineral development corporation covering
strategy development and implementation (ongoing) Assistance in takeover of coal blocks and
program management of their operationalization Strategy for identifying coal blocks, identifying
opportunities for JV formation with other bidders, determination of bid price – for a multi-plant
aluminium and copper major in India (for schedule II and III coal blocks) Operations
improvement for a UMPP and an associated coal mine in the Moher-Singrauli coal-field
Inventory reduction for a steel manufacturing company spread across UK and Netherlands
Ministry of Steel & Mines, Government of India, Policy Research Unit project Ministry of Power,
Coal & Renewables Energy, Linkage rationalization for domestic and imported coal movements
Coal block bidding strategy for a sponge iron player Joint Venture/ alternate partnership model
option assessment for manufacture of rocket projectiles in India by a Ministry of Defence entity
Assessment of alternative models for expediting rehabilitation & resettlement (R&R) at Jharia
coal-field for Ministry of Steel Market assessment for coal supply in Europe and India and FOB
price discount determination for a South African mine with whom an Indian utility had a long
term purchase agreement Strategy for enhancing engineering exports for an export promotion
council Technology development and modernization of mines of a large coal mining company in
India. Work involved correlation of equipment configuration with geo-mining condition and
comparison with best practices. Evaluation of the opportunity to bring in automation and
quantitative estimation of costs required to implement large scale change. Iron Ore Mining
Company: Pricing strategy for India domestic market based on global and domestic demand
supply condition and various other price determinants. Work also involved implementation
support of the new pricing mechanism for two quarters. Ferro Alloy Mining and Manufacturing
Company: Contractor selection for conversion of an open cast ferrochrome mine into an
underground mine. Work involves tender-offer risk assessment, contract formulation, cost
assay of project and assistance in bid evaluation. Assistance to bid of a Mine Development and
Operation (MDO) contract to a mining contractor for a coal mine in Talcher coalfield, Odisha.;
Mine was allocated to a group of 3 private sector companies. Mine Developer & Operator
(MDO) evaluation and selection for an open cast mine in Jharkhand; Mine was owned by a JV of
two large private sector business houses in aluminum and power generation. Mine Developer &
Operator (MDO) evaluation and selection for an open cast mine in the vicinity of Singrauli coal-
fields; Mine was owned by a JV of two large private sector business houses; work involved
conducting of reverse auction. Coal sourcing strategy review for an Indian power utility with
interest in a mine in South Africa Assessment of 2 coal mining blocks in the coal-fields of WCL
command area provided to a large cement player with a view to preparing it for upcoming coal
block auctions. Multi-modal logistics player: Identifying coal washery player for strategic tie-up
and investment. Mining Equipment manufacturer: Market assessment of a specific range of
high capacity underground and opencast equipment in the context of acquisition of the service
assets of another company leading into valuation of the same Funded NGO involved in UIP:
Assisting in the selection of a Supply Chain solution for vaccine logistics and capabilty building
of the public sector distribution. This was a follow-on project of the one above. Funded NGO
involved in UIP: Supply chain strategy & planning and cold-chain PPP model creation for vaccine
logistics in two Indian states. Electronic Meter manufacturer: Under price pressure, this multi-
national corporation was planning backward integration into PCB manufacturing. The work
involved creating the investment case, identifying critical success factors for entry into this
business and devising the organizational structuring options for the new entity.