A Guide to Procurement Costs and How to Slash Them

If you're like most startups, you're always looking for ways to reduce costs without sacrificing quality. And when it comes to the procurement process, that can be a tough balancing act.

On the one hand, you want to ensure you're getting the best possible price for the needed parts and materials. But on the other hand, you don't want to cut corners and end up with an inferior product.

So how do you strike the right balance? By understanding your procurement costs and taking a strategic approach to reducing them. Understanding these costs can also help you revamp your supply chain and inventory management.

Below, we’ll look at the procurement costs definition and offer tips to help you keep these costs as low as possible without compromising on quality.

Procurement Costs Definition

Procurement costs are the expenses associated with acquiring a business's materials and services. In other words, it refers to all the costs a company incurs in its procurement process.

Understanding these costs is vital as it helps determine whether your entire procurement process is efficient. You can use this information to plan cost savings and process improvements.

What Makes Up Procurement Costs?

The procurement cost is the subtotal of different costs involved in the entire procurement process. These costs include:

Base Costs

This is the price of the product or service that you're purchasing. It's the unit cost multiplied by the quantity.

For example, if a product costs $5 per unit and you're buying 1,000 units, your base cost would be $5,000. You should always strive to reduce the base costs by negotiating with suppliers and buying in bulk to get discounts.

Contract Costs

These are the costs associated with the agreements and contracts you have with your suppliers. They include the cost of drafting, reviewing, and negotiating these contracts. The longer the negotiation process, the higher the contract costs since you also have to pay a legal team.

Purchasing Costs

Purchasing costs are the costs of buying the materials or services. They include the cost of placing orders, handling accounts payable, and indirect labor for tasks like data entry and communication between different departments or stakeholders.

Freight Costs

These costs crop up when shipping the goods from the supplier to your warehouse or place of business. These costs can add up, especially if you're importing goods from overseas, so it's important to find ways to reduce them.

You can do this by working with suppliers who are located close to you or by consolidating orders to get discounts on shipping. You can develop strong relationships with cargo carriers to ensure they give you the best possible rates.

Inventory Costs

If you're keeping inventory on hand, you'll incur costs for storing and managing it. They include the cost of renting storage space, insurance, and inventory shrinkage (the loss of products due to theft, damage, or expiration). You might also incur inventory brokerage costs if you outsource inventory management to a third party.

Customs and Taxes Costs

You'll have to pay customs duties and taxes if you're importing goods from another country. These costs can vary depending on the country of origin, the type of product, and the quantity imported.

How Can You Reduce Your Procurement Costs?

Although procurement costs can accumulate, there are ways to mitigate them. You can begin by incorporating the following tips, supported by effective purchasing software:

Review Your Costs Regularly

You can't manage what you don't measure. That's why you should review your procurement costs regularly and perform a spend analysis. Reviewing and spend transparency will help you identify areas where you're spending too much money and where you can cut costs.

Automate Your Procurement Process

You can save time and money by automating your procurement process. Some procurement software solutions can help you automate different aspects of the purchasing process, such as requisition, purchase approval, and tracking inventory levels. This will free up your staff to focus on more important tasks and help you avoid errors that can lead to higher costs.

Streamline Your Purchasing Process

A streamlined purchasing process will help you avoid duplication of effort, reduce errors, and save time. You can streamline your process by implementing a purchase order system and setting up standard operating procedures for your procurement team.

Improve Your Inventory Management

Good inventory management is key to reducing your procurement costs. You can minimize storage and handling costs by keeping only the inventory you need on hand and using just-in-time techniques.

Always ensure that your payment and procurement systems accurately reflect inventory levels to prevent overstocking, under-stocking, and duplicate orders. Healthy stock levels will lower your inventory costs by reducing the need for storage space and insurance.

Bottom Line

Procurement costs are key determinants of whether your startup will make a killing or just slow profits. As a result, it is important to monitor these costs vigilantly and implement strategies to reduce them. The tips highlighted above are some of the most effective ways of reducing procurement costs in your startup.