When running a business, it’s easy to focus on your cost of goods sold or salaries when looking to cut costs, but indirect procurement expenses can be just as large of a driving force behind the company cost structure. In this article, three simple steps are provided to reduce unnecessary expenses associated with indirect procurement and to help you keep these processes running efficiently. As in many process improvement efforts, the first step is to take inventory of the current status of your indirect procurement operations. The second step is focused on simplifying your processes, and the third step looks at ways to cut purchase prices.
Step 1. Evaluate Current Processes
In order to understand the best ways to improve a process, it is crucial to understand the starting point. Evaluating how your company currently handles indirect procurement, using quantitative data whenever possible, will illustrate any positive or negative patterns, and will provide a useful benchmark for evaluating future performance.
Step 2. Simplify Operations Through Compliance and Consolidation
Businesses can often fall into the trap of doing things the way they have always been done, and then miss out on valuable opportunities. Once you have a solid understanding of the metrics surrounding your indirect procurement, it is important to take the time and read through the agreements governing those sourcing relationships. Periodic reviews of these agreements can bring compliance issues to light, allowing you to take quick action, and ensuring that you are receiving the full benefit of the bargain. Something as simple as having those responsible for sourcing meet and discuss updates or trends in their respective areas can help share information that is beneficial to the company as whole. Also, be sure to take advantage of any applicable discounts provided for in the agreements, and pay special attention to any renewal clauses. Renewal clauses may contain incentives for early renewals or allow for more flexible arrangements in the future as well as indicate supplier strength. Understanding any power dynamics will make it easier to effectively renegotiate agreements in Step 3.
Consolidation is another great option for simplifying indirect procurement processes. Businesses are constantly growing and expanding their product lines. There is a good chance that a supplier will have added additional capacity or products during the term of a supply agreement. When looking at renewing a supply agreement, a few simple questions can help you understand any new offerings. The more products you can source from one supplier, whether in terms of variety or quantity, the less logistical issues you will run into. This can help to streamline processes, but it does require more interdependence with suppliers and should only be pursued if there is a trusting relationship. Such a relationship should heavily consider suppliers bandwidth and alternatives in case of emergencies.
Step 3. Reduce Costs by Renegotiating and Recycling
Renegotiating contracts is one of the best ways to cut costs in indirect procurement. Leveraging company growth for larger bulk discounts, using changes in respective power in the market, or using an experienced attorney in negotiations are all ways to use the renegotiation process to reduce costs. Identifying opportunities to recycle products consumed within your business operations is another great way to reduce overall spending. Sometimes even small changes in use can extend the useful life of products, or different business groups may be able to use products at different stages of its lifecycle. For instance, departments with only light computer needs could use computers after the technology heavy departments need to update their systems.
Each company has very different needs when it comes to indirect procurement. When looking at your indirect procurement operations, the most important thing to do is continually monitor and look for ways to improve your processes. If issues come up or if costs need to be brought down, the three steps above — evaluation, simplification, and cost reduction — can help to streamline processes and reduce the overall burden of indirect procurement on your business.
If you are considering entering into or renegotiating an indirect procurement agreement or have a question involving such an agreement, you should work with an attorney discuss your next steps. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.