Control Costs and Enhance Profitability

5 ways procurement helps control costs and enhance profitability

On the other hand, when spending and procurement are conducted with a strategic and risk management based approach, unnecessary costs can be controlled and a businesses' profitability increases. Here are 5 ways that procurement helps control a business' costs and enhances profitability:

1. Keeping the inventory in balance

With a procurement process and team in place, inventory levels within a business can be maintained at a sustainable level. This could mean ensuring levels of resources that maximise the efficiency of facility space and employee time or simply regulating how much liquid cash is tied up in the product. A procurement team needs to manage this with customer demands as well, as a company is expected to maintain enough product/inventory on hand to satisfy consumer demands. Ideally, no money is wasted on the old stock that is unable to be sold, with procurement teams maintaining the exact level of inventory needed at any given time, to allow for maximum cost control.

2. Consolidating orders

Procurement teams should work to always improve the efficiency of their supply chain, and to receive their resources in as few shipments as possible. Not only will companies save money from lower and fewer shipping costs, consolidating orders allows for a more efficient receiving and processing of the goods within the business. A great deal of strategy can go into maximising the efficiency of product procurement. The Swedish furniture giant IKEA is an excellent example here. IKEA, famous for their flat-pack products, extends this kind of efficiency-focused thinking towards every part of their business. Their Glimma Tea Candles serve as an example. The procurement team realised that the loose bags of 100 tea light candles could be transported and sold much more efficiently if they were stacked and packed instead. This new approach allowed IKEA to reduce handling time and resulted in 108 more packages of candles fitting on every pallet. This meant roughly 400 fewer trucks transporting them per year, greatly reducing unnecessary costs and carbon footprint.

3. Organisation

Procurement allows for a streamlined process of resources within a company. Bringing organisation and order to complex systems decreases time spent by sifting through unorganised processes and/or product. Time is money, and the less time squandered means reduced costs and savings for the business.

4. Making use of discounts

Most businesses and procurement teams will negotiate a different price with their suppliers than that of the market price and always try to access the best price possible for their business. Discounts to resources, even if they're small, all add up and help increase profitability. Many suppliers are willing to negotiate deals and lower prices through contracts that take into account the amount of product being bought (bulk purchasing generally being cheaper) as well as longevity of the contract (i.e. agreements to continue buying from that same supplier for a number of years).

5. Championing innovation and growth

When innovation is fostered within procurement, it will have a flow-on effect to the rest of the business. The procurement team chooses which suppliers a business will work with, and their choices define the type of supply chain that the business operates in. By choosing to work with suppliers that drive innovation and add value, a business' procurement teams can actively position their business to be in a more competitive position. Procurement can shift a business and champion innovation by choosing suppliers that use the latest technology, equipment, and processes, cementing innovation as a step in the ladder to increased profitability.