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How to reduce costs on the company's procurement

Procurement is an important department in a company. Because they are responsible for all the company’s expenses and there is a lot of money involved. Every way to save money on the expenses means more net profit for the business. That’s why every company try to minimize their expenses. It may sound illogical, but outsourcing a part of the procurement can save the company a lot of money. In this article we will explain how a company can reduce the costs on the procurement.

The different supplier categories

Every company needs suppliers to be able to do their business. For example, a car manufacturer needs batteries and tyres to produce cars. Most of the time a car manufacturer doesn’t produces batteries and tyres themselves. They have suppliers for it. But office supplies are also important for a company. An employee needs a desk and a chair and may want to drink coffee out of a coffee cup.

These suppliers can be segmented in different categories. The suppliers of batteries and tyres are important for the core business of a company. Without these supplies the company can’t produce the car. Office supplies like coffee cups are less important. Without coffee cups the company can still continue with their core business. But nevertheless, as company you want to be able to give the employees coffee.

In general, we can split these suppliers in three different categories:

  • A-supplier
  • B-supplier
  • C-supplier

A-suppliers are suppliers for the most important supplies like your raw materials, goods and services necessary for the core business of the company. A company have to deal with those suppliers frequently. B-suppliers are a little less frequently suppliers, but still important for the business. A company uses them multiple times a year. The last category are the C-suppliers. C-suppliers are suppliers of goods which doesn’t influence the company’s core business and therefore are not that important for a company. The company only deals with them once or twice a year. Most of the time the biggest part of the supplier base consists of these C-suppliers.

Because the procurement receives invoices from A-suppliers and B-suppliers frequently, they are used to the invoices of these suppliers. They already have arranged the best prices and conditions. The procurement of the materials, goods and services from these suppliers are necessary for the core business of the company. The procurement of supplies important for the company’s core business is called direct procurement.

In opposite of direct procurement there is indirect procurement. Indirect procurement is the procurement of materials, goods and services which doesn’t happen on a regular base and doesn’t harm the company’s core business. The suppliers for the indirect procurement are C-suppliers. Invoices from C-suppliers who are only necessary once or twice a year are very time- and money consuming. Because the procurement has to create a creditor for every supplier and has to control each single invoice and all the different payment terms. This is very time-consuming and mistakes are easily made.

Save cost and reduce the supplier database by outsourcing the indirect procurement

A company can easily save a lot of time and money by outsourcing the indirect procurement. Getting rid of the C-suppliers who cost the company a lot of time and money by outsourcing the indirect procurement. By outsourcing the invoice management of the indirect procurement, a company can reduce the supplier base up to almost 80%. This will unburden multiple departments and can save up to 21% on internal costs which means more net profit for the company