Balancing procurement savings with sustainability goals can be a tough challenge.
Many procurement professionals face this pressure as they work to reduce costs without compromising their company’s values. According to Amazon Business’s annual study, 85% of companies face challenges in reaching their procurement sustainability targets, largely due to difficulty finding suppliers who follow sustainable practices.
If you’re a procurement professional, you’re likely feeling this pressure as you work to reduce costs without compromising on your company’s values.
The procurement software market is growing rapidly. In fact, in 2024, it was valued at USD 8.2 billion, and by 2033, it is expected to reach USD 17.5 billion. This shift points to the importance of technology in achieving procurement savings and improving overall procurement processes.
So, what does this mean for you? How can you use today’s tools and strategies to cut costs and still meet your sustainability goals? This blog will explore actionable strategies to help you save more, improve efficiency, and create long-term value in your procurement processes.
To reduce costs effectively, let’s start by understanding the types of procurement costs and their causes.
What is Cost Reduction in Procurement?
At its core, cost reduction in procurement means finding ways to spend less on purchasing goods and services without sacrificing quality. It’s not just about cutting prices—it’s about making smarter decisions that improve efficiency, streamline processes, and create value for the business.
Example: You’re a procurement manager at a growing company. Your team has been buying office supplies from the same supplier for years. While prices haven’t changed much, you notice that your team spends significant time ordering and managing the inventory. You decide to explore new options. After evaluating several suppliers, you identify one that offers not only lower prices but also an automated ordering system that saves your team hours every week. |
This example shows how procurement savings go beyond price negotiations.
Cost reduction involves evaluating all aspects of the procurement process, such as supplier performance, inventory management, and even technological tools, to ensure the best possible use of resources.
Also Read: Steps to Improve Your Procurement Process in 2025
How Procurement Cost Works?
Procurement costs are more than just the price of what you buy—they cover several factors that affect your bottom line. Understanding these costs is crucial for achieving procurement savings and making smarter decisions.
Let’s break down the different types of costs involved in procurement:
1. Direct Costs
Direct costs are the most obvious, including the price of the goods or services you buy. They directly impact your budget and are the easiest to track. Managing these costs efficiently ensures you’re spending wisely without compromising quality.
2. Indirect Costs
Indirect costs are hidden expenses that can accumulate over time, such as shipping, storage, and insurance. While each of these costs may appear small individually, they can quickly add up. Monitoring indirect costs is essential to understanding the complete picture of your procurement spend.
3. Operational Costs
Operational costs are those associated with maintaining the procurement function itself. This includes staff salaries, system maintenance, and managing supplier relationships. While necessary to ensure smooth operations, it’s crucial to optimize these costs in order to keep them under control.
4. Hidden Costs
Hidden costs are those unexpected expenses that aren’t easy to spot upfront. These could be penalties for late deliveries, rush shipping fees, or returns due to poor quality. Identifying these hidden costs is key to managing your total procurement spend more effectively.
5. Strategic Costs
Strategic costs are investments that help improve procurement processes over time. This might include spending on supplier development, technology upgrades, or long-term contracts. While these costs might feel significant at first, they deliver long-term value by improving efficiency and reducing costs in the future.
6. Compliance and Risk Management Costs
This category includes the costs of ensuring your procurement activities meet legal and regulatory requirements. It covers things like audits, certifications, and managing risks in your supply chain. These costs are necessary to stay compliant, but should be managed to avoid unnecessary spending.
7. Transaction Costs
Every procurement action involves transaction costs—whether it’s processing orders, negotiating contracts, or managing invoices. These costs may seem small, but when you’re dealing with frequent purchases, they can add up. Keeping these costs in check helps streamline your procurement process.
8. Supply Chain Costs
Supply chain costs cover the logistics of moving goods through the supply chain. This includes storage, warehousing, inventory management, and distribution. Optimizing these areas can lead to significant procurement savings by reducing inefficiencies and improving overall workflow.
Now that we know how it works, let’s jump into some quick wins that can help you reduce procurement costs right away.
How to Reduce Procurement Costs?
Short-term initiatives are the way to go when you need to see results quickly. These are actions you can take right now to achieve procurement savings and improve efficiency without waiting for long-term investments or changes. Let’s dive into some effective strategies:
1. Review Existing Contracts
A quick way to reduce costs is by revisiting your current contracts. For instance, if your contract with a supplier hasn’t been reviewed in years, you may find outdated pricing that can be updated. By renegotiating terms, like adjusting order frequencies or volume discounts, you can unlock savings and ensure more competitive pricing.
2. Rethink Product Specifications
Take a look at whether the specifications for certain products or services are truly necessary. For example, a company might be purchasing premium office supplies based on brand recommendations. By shifting the focus to performance rather than specific features, they can open the door to a wider range of suppliers, leading to lower prices.
3. Reevaluate What’s Necessary
Regularly assess your inventory or service needs. For instance, if a business is stocking multiple varieties of the same product, standardizing to a single version can help reduce storage costs. Fewer options mean fewer products to manage, ultimately saving on inventory and warehousing costs.
4. Tackle Unapproved Spending
Maverick or rogue spending can easily eat into your savings. If purchases aren’t aligned with supplier contracts, you’re missing out on volume discounts. Implementing processes like purchase requisitions or e-catalogs can help ensure every purchase is approved and within budget, preventing unapproved spending from slipping through the cracks.
5. Streamline Operations
Operational inefficiencies—like emergency purchases or rush shipments—often result in inflated costs. Improving internal procurement processes and planning ahead can reduce these urgent costs. For example, automating the procure-to-pay (P2P) system to eliminate unnecessary paperwork and optimize approval workflows can significantly cut operational costs.
6. Plan Ahead
Effective procurement planning allows you to reduce the risk of last-minute orders. A business with a solid forecast can avoid costly expedited deliveries. Planning purchases in advance ensures that you have everything you need on time, at a lower cost, without the need for emergency purchases.
7. Evaluate Supplier Performance
Regularly assess supplier performance to ensure you’re getting the best deal. If you find that some suppliers are not competitive or are failing to meet delivery expectations, it may be time to consolidate suppliers. By working with fewer, more reliable suppliers, you can negotiate better prices and streamline your supply chain.
8. Use Data to Your Advantage
Data plays a crucial role in procurement decisions. By analyzing past purchasing data and supplier performance, you can uncover opportunities for savings. For example, if a particular product isn’t selling as well as expected, using that insight in negotiations can help lower the price, thus reducing procurement costs.
Quick wins are fantastic, but how do you ensure long-term procurement savings? Let’s explore strategic, sustainable approaches.
Beyond Quick Wins: Long-Term Approaches for Procurement Cost Savings
While short-term cost reduction strategies can provide quick wins, medium- and longer-term initiatives focus on creating sustainable cost savings and improving procurement processes for the future. Here’s how to plan it:
1. Consider Outsourcing for Cost Savings
Outsourcing allows businesses to hand off non-essential procurement tasks to external experts. This can significantly reduce labor and overhead costs, especially in areas like logistics, security, and facilities management.
Why consider outsourcing?
- Expertise: Access to specialized market knowledge and global expertise that your team may lack.
- Cost Savings: Outsourcing partners often offer economies of scale, which means you can benefit from reduced costs.
- Efficiency: Free up your team by outsourcing high-volume, low-value tasks, letting them focus on more strategic goals.
- Faster Results: With external partners managing time-consuming tasks like negotiations, you can expect quicker turnarounds.
Before committing, it’s important to weigh the costs of outsourcing against doing things in-house. The goal is to find the best savings for your business.
2. Leverage Technology to Cut Costs
Technology can be a game-changer for procurement. By automating and simplifying processes, tech solutions help reduce overhead and streamline operations.
Take AkiroLabs AI-powered end-to-end procurement management as an example. It tracks inventory levels and spending in real time, giving you insights into waste and offering suggestions for improvement. |
With automated inventory management, tech tools can alert your team when it’s time to restock, helping you avoid over-ordering and cutting down on excess inventory costs.
3. Implement Category Management
Category management involves grouping procurement expenses by type of product or service and managing them strategically throughout the lifecycle. This method can unlock significant cost savings.
By focusing on category management, procurement teams can reduce time spent on repetitive tasks, allowing them to concentrate on high-value work. This also opens the door for better supplier negotiations, potentially leading to lower prices.
4. Centralize Procurement to Boost Efficiency
When procurement is decentralized, savings opportunities can slip through the cracks. A centralized strategy brings all purchasing decisions under one roof, making procurement more efficient.
Key benefits include:
- Streamlined Operations: Better coordination and fewer chances for mistakes like duplicate purchases.
- Cost Reduction: Fewer suppliers mean more competition, leading to better deals.
- Efficiency Gains: With fewer staff involved and less training needed, processes run more smoothly.
Using a spend analysis tool can also help uncover further savings, even within a centralized system.
5. Manage Procurement Risk
Every business faces procurement risks, especially when too much reliance is placed on a single supplier. To minimize risk, diversify your supplier base to ensure business continuity.
Additionally, managing risk means thinking ahead. For instance, negotiating contracts with value-added benefits, such as extended warranties or free shipping, can reduce reliance on third-party vendors and help you save money.
6. Cut Costs by Reducing Consumption
A simple yet effective way to reduce procurement costs is by lowering consumption. Take a step back and ask if every purchase is truly necessary. This is especially true for high-ticket items like laptops, smartphones, or leased vehicles.
By setting clear purchasing policies, your team can avoid unnecessary spending and make more mindful purchasing decisions.
According to PWC’s 2023 US Risk Perspectives Survey, 57% of procurement professionals saw big improvements in risk management, thanks to the power of technologies like automated workflows, advanced analytics, and AI-driven insights. |
7. Invest in Employee Training
Your team is your greatest asset. Investing in their development can pay off in the long run. Training staff in negotiation skills, for example, can help them secure better deals with suppliers. Additionally, ensuring they understand procurement processes more deeply will lead to smarter, more cost-effective decisions.
Understanding how procurement costs function helps us differentiate between cost avoidance and cost savings, key concepts for any procurement strategy.
Cost Avoidance vs. Cost Savings
When managing procurement expenses, you’ll often hear about cost avoidance and cost savings. While they may seem similar, they have distinct meanings and roles in your overall strategy. Let’s break them down:
1. Cost Savings
Cost savings refers to reducing actual spending on goods or services. This happens when you find ways to lower the price you pay for something, either through negotiating better deals, choosing more cost-effective suppliers, or improving operational efficiencies. The savings are real, immediate, and measurable.
Example: If you negotiate a 10% discount on office supplies or switch to a more affordable supplier without sacrificing quality, you’re achieving cost savings. The money saved directly lowers your expenses, contributing to your procurement budget.
2. Cost Avoidance
Cost avoidance, on the other hand, refers to actions taken to prevent future costs from arising. These aren’t immediate savings, but strategies designed to avoid or delay expenses that would have otherwise occurred. While you don’t see an immediate impact on your budget, cost avoidance helps you avoid unnecessary spending in the future.
Example: Let’s say you invest in supplier risk management to avoid the cost of dealing with late deliveries or poor-quality products. By doing so, you’re avoiding costs that would have arisen from such issues in the future, even though you aren’t cutting a check today.
Let’s simplify the difference further using a table below.
Aspect | Cost Savings | Cost Avoidance |
Definition | Reducing current expenses | Preventing future costs from occurring |
Impact | Immediate and measurable | Long-term, often less tangible |
Example | Negotiating discounts on current purchases | Investing in supplier risk management to avoid future penalties |
Timing of Benefit | Short-term, reflects directly in the current budget | Long-term, it avoids potential future expenses |
With that distinction clear, let’s explore how cost reduction and cost cutting stack up in the procurement world.
Cost Reduction vs. Cost Cutting
When it comes to managing procurement expenses, you’ve probably heard the terms cost reduction and cost cutting used a lot. While they might sound similar, they actually mean different things.
Cost-cutting is usually a quick fix. It involves immediately slashing expenses, like reducing budgets, firing staff, or eliminating unnecessary resources. While this might save money fast, it can hurt the quality of products or services in the long run.
On the other hand, Cost Reduction is about making smarter, long-term choices to lower expenses without sacrificing quality. This could mean finding more efficient suppliers, improving processes, or investing in technology that helps you work more effectively. The goal here is to achieve sustainable procurement savings that stick around.
Example Scenario:
Let’s say your company needs to buy raw materials.
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Let’s understand the difference further through this table below:
Aspect | Cost Cutting | Cost Reduction |
Approach | Short-term, immediate savings | Long-term, strategic savings |
Focus | Eliminating expenses | Optimizing processes for efficiency |
Impact | Can impact quality and service | Maintains or improves quality |
Example | Reducing staff or budgets | Streamlining supplier management or tech investments |
Once we’ve differentiated cost reduction and cost cutting, it’s time to uncover why cost reduction is a “must” in procurement.
Why is Cost Reduction Necessary in Procurement?
As a procurement professional, you’re always looking for ways to improve the bottom line. Cost reduction in procurement helps you do just that, without sacrificing quality. By focusing on procurement savings, you can make smarter decisions that reduce expenses and drive long-term growth and efficiency for your business.
Let’s break down why focusing on cost reduction should be a key priority for your procurement strategy:
- Profitability Improvement: Reducing procurement costs increases profit margins, allowing for reinvestment in business growth.
- Enhanced Productivity: Streamlining procurement processes boosts efficiency, freeing up time for strategic tasks.
- Competitive Advantage: Cost savings enable better pricing or faster service, helping you stay ahead in the market.
- Cash Flow Improvement: Lower procurement costs improve cash flow, providing financial flexibility for opportunities.
- Strategic Resource Allocation: Savings allow for reinvestment in key areas like R&D, marketing, or customer service.
Also Read: Top 15 Global Procurement Events for 2025
Of course, reducing costs sounds great, but are there any downsides to cost reduction in procurement? Let’s find out.
Disadvantages of Cost Reduction in Procurement
While cost reduction can lead to significant benefits, it’s not always smooth sailing. There are some potential downsides to keep in mind before diving into cost-cutting strategies. Here are some of the key disadvantages:
- Risk of Lower Quality: Cutting costs may lead to cheaper materials or suppliers, affecting product quality and customer satisfaction.
- Strained Supplier Relationships: Pushing for lower prices can harm supplier relationships, affecting service levels and reliability.
- Short-Term Focus: Focusing too much on immediate savings can prevent long-term growth and innovation.
- Employee Morale Issues: Cost cuts like layoffs or salary reductions can damage morale, productivity, and increase turnover.
- Supply Chain Disruptions: Reducing inventory or switching suppliers for savings may cause delays, shortages, and customer dissatisfaction.
Also Read: 6 Steps to Manage Common Procurement Risks
To keep the momentum going, let’s take a closer look at how you can effectively measure and calculate procurement savings.
How Do You Calculate Cost Savings in Procurement?
Calculating procurement savings is all about comparing what you spent before you made any changes to what you’re spending now. This helps you see if your cost-saving efforts are working and if you’re getting the results you expect.
Let’s take a look at the key metrics and formulas that can help you track procurement savings easily.
1. Cost Savings Calculation Formula
The most straightforward way to calculate cost savings is to subtract the new cost from the original cost:
Cost Savings = Original Cost – New Cost |
This formula applies when you’ve made a direct change, such as negotiating a lower price or switching suppliers.
2. Percentage Cost Savings
To understand the percentage reduction in costs, you can calculate the savings as a percentage of the original cost. This is particularly useful for reporting or comparing across different categories.
Percentage Cost Savings = (Cost Savings / Original Cost) x 100 For example, if you were able to reduce the cost of a product from $100 to $85, your cost savings would be $15. The percentage cost savings would be: ($15 / $100) x 100 = 15% |
3. Procurement Savings Per Unit
In some cases, you may want to calculate savings on a per-unit basis. This is especially useful when buying large quantities or managing multiple suppliers for the same product.
Procurement Savings Per Unit = (Old Unit Cost – New Unit Cost) x Number of Units Purchased For instance, if you were buying 1,000 units of a product, and the price dropped from $10 per unit to $8 per unit, your savings per unit would be $2. The total savings would be: ($10 – $8) x 1,000 = $2,000 in savings |
4. Total Procurement Savings
To calculate the total savings across all categories or products, simply sum up the savings from each individual purchase.
Total Procurement Savings = Sum of All Cost Savings Across Categories |
If you’ve made savings in multiple categories—such as raw materials, office supplies, and logistics—add them all up to calculate the total procurement savings for your business.
5. Return on Investment (ROI) in Procurement
To measure the effectiveness of procurement initiatives in relation to the resources spent, you can calculate the return on investment (ROI). This shows how much value your procurement team has generated compared to the costs associated with procurement activities.
ROI = (Total Savings – Total Procurement Costs) / Total Procurement Costs x 100 For example, if you saved $50,000 on procurement and spent $10,000 on procurement activities (such as software, staff training, etc.), the ROI would be: ROI = ($50,000 – $10,000) / $10,000 x 100 = 400% ROI |
Once you’ve calculated your savings, it’s crucial to track additional key metrics to ensure your cost-saving efforts stay on course.
Additional Key Metrics to Track for Effective Cost Savings
To fully understand how your procurement strategies are performing, you should also track these key metrics:
- Cost per Order: Measures how much it costs your business to process each purchase order.
Formula: Cost per Order = Total Procurement Costs / Number of Orders Processed |
- Supplier Performance: Tracks supplier reliability and the value they deliver, helping you identify where savings can be made by working with higher-performing suppliers.
Formula: Supplier Performance = (On-time Deliveries + Quality of Goods) / Total Orders |
- Inventory Turnover Rate: Shows how often inventory is sold and replaced over a period, which can affect procurement costs if inventory is overstocked.
Formula: Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory Value |
- Procurement Cycle Time: Measures the efficiency of the procurement process, showing how long it takes to complete the entire process from order to delivery.
Formula: Procurement Cycle Time = Total Time for Procurement / Number of Orders Processed |
Also Read: Understanding Benefits and Importance of Procurement Market Intelligence
With metrics covered, let’s look at the best practices that can help drive those procurement savings further.
How to Drive Procurement Savings: Key Best Practices
Now that you’re clear on the basics, let’s dive into some practical steps you can take to reduce procurement costs and boost savings. These best practices are designed to help you make smarter, more efficient decisions that lead to long-term results:
- Make Data Work for You: Track spending patterns and supplier performance to identify savings opportunities. Use spend analysis tools and calculate Total Cost of Ownership (TCO) to uncover hidden costs like maintenance and energy usage.
- Strengthen Supplier Relationships: Build long-term partnerships for better pricing, improved service, and exclusive deals. Negotiate for volume discounts or extended payment terms.
- Streamline Procurement Processes: Standardize procedures to eliminate inefficiencies, reduce mistakes, and gain better control over spending. A consistent approach makes spotting savings opportunities easier.
- Embrace Category Management: Manage product categories separately for strategic focus. Group similar products together to negotiate better prices and streamline operations. Bundle purchases to secure competitive deals.
- Consolidate Your Suppliers: Reduce complexity by working with fewer suppliers. This lowers administrative costs and boosts negotiating power, leading to better prices and simpler processes.
- Automate Procurement Workflows: Implement e-procurement tools to automate order processing and supplier communication tasks. This cuts down on manual work and accelerates procurement cycles.
- Optimize Your Inventory: Review stock levels and demand regularly to keep inventory lean. Use Just-In-Time (JIT) techniques to avoid over-ordering and reduce storage costs.
- Foster Collaboration Across Teams: Ensure procurement, finance, and operations work together to eliminate unnecessary spending and identify savings opportunities across departments.
- Prioritize Sustainability: Choose suppliers with sustainable practices to reduce waste and energy costs. Bulk shipping and minimal packaging also contribute to savings and environmental impact.
- Keep Monitoring and Improving: Regularly review contracts, track spending, and stay updated on market trends. Continuously adjust your strategies to ensure savings are maximized.
Ready to take it a step further? Let’s see how akirolabs can help streamline your procurement processes and drive even more savings.
How akirolabs Helps You Achieve Procurement Savings and Reduce Costs?
Simply focusing on cost savings is no longer enough. Companies expect procurement to drive more than just cost reductions; they need procurement to contribute to innovation, sustainability, risk management, and growth. A narrow focus on savings often leads to missed opportunities and value erosion across the business.
At akirolabs, we shift the focus from cost-cutting to value creation. Our approach helps businesses not only reduce costs but also generate lasting value. And when value is created, cost savings follow naturally and sustainably.
Our Approach to Value-Driven Procurement
1. Expanding Strategic Spend Coverage: We help businesses manage a larger portion of their spend strategically across different categories and projects. By doing so, we unlock new opportunities for value capture, mitigate risk, and prevent value leakage across the organization.
2. Aligning Procurement with Business Strategy: With akirolabs, procurement strategies are no longer isolated efforts. Our platform ensures that each strategy is aligned with your broader business objectives—whether it’s driving innovation, improving speed-to-market, enhancing resilience, or ensuring sustainability. This alignment transforms procurement from a cost center into a key driver of value.
How the Platform Delivers It
- Guided Strategy Development: Our methodology guides procurement teams in developing effective, comprehensive strategies. The structured process ensures that strategies are well thought out, consistent, and collaborative, enabling faster execution and better results.
- Real-Time Insights for Smarter Decisions: With akiroAssist, our advanced tools provide real-time suggestions and scenario analysis. This helps procurement teams make better decisions quickly, improving the overall quality and alignment of their strategies.
- Scenario Modeling for Informed Decision Making: Our platform allows you to compare sourcing strategies across various factors such as cost, sustainability, and resilience. This gives you the clarity needed to make trade-offs that align with both procurement goals and overall business priorities.
- Procurement with Purpose: Sustainability is built into our approach, not an afterthought. With our “Procurement with Purpose” module, strategies are assessed not only on savings but also on their environmental and social impact, ensuring your procurement decisions align with your company’s values.
- Continuous Strategy Monitoring and Optimization: With our performance tracking tools, we ensure that procurement strategies are continuously evaluated and refined. This allows businesses to maximize value, track progress, and adjust as needed to stay on course.
The Outcome
With akirolabs, procurement drives:
- Increased strategic coverage = more value opportunities
- Reduced value leakage = greater business impact
- Stronger alignment with business goals = enhanced stakeholder trust
- A broader definition of value = savings, innovation, sustainability, and resilience
Ultimately, akirolabs helps you shift the focus of procurement from merely achieving savings to driving sustainable, long-term value. This value-first approach leads to both immediate cost savings and lasting business growth.
Conclusion
We’ve covered some smart strategies to help boost your procurement savings—from streamlining category management to making better use of data and building stronger supplier relationships. These steps are essential for making your procurement process more efficient and cost-effective.
But to truly unlock the potential of these strategies, you need a platform that ties everything together. That’s where akirolabs comes in. With its user-friendly tools, akirolabs helps you manage procurement more effectively, track savings in real time, and collaborate seamlessly with your teams.
akirolabs is helping businesses like yours transform their procurement processes. Ready to start saving? Book a demo now!
