5 procurement strategies to increase cash flow and cost savings

We understand that the bottom line is at the top of every procurement leader’s agenda. We work with dozens of global manufacturing enterprises and recommend they adopt several strategic approaches to enhance cash flow and procurement cost savings. 

1 - Identify areas for improvement in your procurement structure

Often, we are so busy doing and delivering that it’s difficult to take a step back and analyze where adjustments can be made. However, procurement leaders can identify areas for improvement in their structure by implementing a systematic approach that involves data analysis, stakeholder feedback and continuous monitoring. Here are some detailed steps and methodologies you can use to pinpoint inefficiencies and areas for potential enhancement:

Conduct a comprehensive procurement audit: A thorough audit of the existing procurement processes helps identify inefficiencies, non-compliance and areas lacking in performance. This audit should cover all aspects of procurement, including:

• Supplier management
• Contract compliance
• Spend analysis
• Procurement cycle times

Implement Key Performance Indicators (KPIs): Utilizing KPIs effectively can provide insights into the performance of the procurement function. Common procurement KPIs include:

• Cost savings
• Spend under management
• Procurement ROI
• Supplier performance metrics
• Cycle times for procurement processes. 

Regularly tracking these KPIs helps identify trends and pinpoint areas needing improvement.

Gather stakeholder feedback: Engaging with internal stakeholders (e.g., procurement staff, end-users and management) and external stakeholders (e.g., suppliers) can provide valuable insights into the effectiveness of procurement processes. Feedback can highlight pain points, inefficiencies and areas where the procurement process does not meet the needs of its users. 

Analyze spend data: Detailed analysis of spend data can reveal categories with excessive spending, potential for supplier consolidation, or opportunities for bulk purchasing. This analysis helps in understanding where negotiations can be leveraged for better terms or where new supplier relationships may be beneficial.

Review supplier performance and relationships: Regularly assessing supplier performance against set benchmarks and contractual agreements can identify suppliers who consistently underperform. This review helps in making informed decisions about continuing, renegotiating, terminating supplier contracts or consolidating the amount of vendors you manage. Check out our guide to vendor consolidation, including the benefits for cost savings, here. 

Benchmark against industry standards: Comparing the organization’s procurement metrics with industry standards or best practices can highlight areas where the organization is lagging. This benchmarking can serve as a guide for adopting new practices or technologies that improve efficiency and effectiveness.

At DSSI, our AI-powered MRO benchmarking tool is designed to help you gather actionable market insights quickly through a self-service portal, leveraging our most recent sourcing results. The process is simple and allows you to quickly benchmark your current spend using our new Spend Analytics tool. The resulting report details savings opportunities including process improvements.

Continuous improvement and training: Implementing a continuous improvement process where procurement policies and procedures are regularly reviewed and updated can help in adapting to changing market conditions and internal company needs. Additionally, investing in training and development for procurement staff ensures they are skilled in using new technologies and methodologies, which can lead to better procurement outcomes. According to a study by SAP, only 41% of procurement teams possess the skills and abilities required to adopt new technologies, so this is vital. 

Risk assessment and management: Evaluating the procurement function for potential risks, such as supplier dependency or compliance issues, and implementing strategies such as risk transfer to third party procurement vendors or regular compliance audits to mitigate these risks can improve the robustness of the procurement structure.

By systematically applying these strategies, procurement leaders can effectively identify areas for improvement, implement foundational changes and optimize the procurement structure to support organizational goals more effectively.

2 - Restructure an inefficient procurement structure

Now that you’ve identified areas for improvement, it’s time to restructure. When we use the word “restructure”, people can start to get worried. This implies vast, expensive changes, but this doesn’t have to be the case. Below we outline how we believe you can maximize the efficiency of your procurement operation. 

Invest in and adopt advanced procurement technologies: The technological shift procurement has taken post-pandemic cannot be overstated. This is bar none the biggest driver of efficiency. 

Integrating advanced technologies such as AI and machine learning can streamline procurement processes, enhance data accuracy, and provide data-led and actionable insights. This helps in making informed decisions, reducing manual errors, and improving overall efficiency. 

It also enhances visibility and control. For instance, adopting advanced procurement technologies like eProcurement systems can automate and streamline procurement processes, provide real-time data and boost transparency across the procurement cycle while pinpointing bottlenecks. 

Employing predictive analytics in procurement also allows for better forecasting of price trends, demand and supply chain disruptions. This proactive approach helps in adjusting procurement strategies in advance, thus avoiding rush charges and expedited shipping costs, which can erode cash flow.

Implement strategic sourcing: Developing a strategic sourcing approach involves analyzing spending patterns, assessing supplier performance, and understanding market dynamics and the total cost of ownership. This enables procurement leaders to identify opportunities for cost savings and consolidation, improve supplier negotiations and ensure the procurement of high-quality materials.

See how DSSI saved one manufacturing giant 27% on sourcing.

Enhance supplier relationship management: Building strong relationships with suppliers is crucial. This involves regular communication, collaborative problem-solving and joint development initiatives. Strong supplier relationships can lead to better pricing, improved quality, and more reliable supply chains. Regular performance and contract reviews ensure that terms remain competitive and aligned with the company’s financial goals.

Optimize inventory management: Effective inventory management strategies such as Just-In-Time (JIT) can reduce holding costs and minimize waste, freeing up working capital by receiving goods only as they are needed in the production process. This requires accurate demand forecasting and close coordination with suppliers to ensure timely delivery of materials. Additionally, regular auditing and demand planning can prevent overstocking and under-utilization of resources.

Focus on Total Cost of Ownership (TCO): Considering the total cost of ownership rather than just the purchase price can lead to significant savings. This includes evaluating costs related to procurement, maintenance, operation and disposal of materials.

Restructure organizational roles: Redefining roles and responsibilities within the procurement team can ensure that each member is effectively contributing to goals. This might involve training and development programs to enhance skills and knowledge in key areas.

Regular performance reviews and feedback: Conducting regular reviews of procurement processes and supplier performance can help identify areas for improvement. As previously mentioned, feedback from stakeholders should be actively sought to refine procurement strategies and practices.

Implement lean procurement principles: Adopting lean procurement principles can help eliminate non-value-added activities and reduce waste. This involves analyzing procurement processes and identifying areas for improvement, such as reducing unnecessary approvals or automating routine tasks. 

Develop a resilient supply chain: Creating a resilient supply chain involves diversifying the supplier base, developing contingency plans and maintaining buffer stocks. 

Compliance and ethical standards: Ensuring compliance with regulatory requirements and maintaining high ethical standards in procurement practices can prevent legal issues and enhance the organization's reputation.

By implementing these strategies, leaders can effectively restructure an inefficient procurement structure, leading to improved efficiency, reduced costs and a more robust supply chain.

3 - Extend payment terms for increased cash flow

Extending supplier payment terms is one of the challenges climbing procurement agendas. At DSSI, we are increasingly seeing customers pushing for even 90-day payment terms (something that we can absolutely help you deliver on). This must be balanced with maintaining good supplier relationships to ensure that it does not affect the supply chain adversely.

Extending payment terms allows businesses to retain their cash longer, providing them with the liquidity needed to manage day-to-day operations, invest in growth initiatives, or handle unexpected expenses. This improved cash flow can also be used for debt reduction or other strategic priorities, enhancing the company's financial health and operational agility. 

4 - Implement regional procurement strategies

Adopting regional procurement strategies can support local economies and potentially reduce costs. Local sourcing might offer faster delivery times and lower transportation costs, contributing to reduced overall procurement expenses. However, it's essential to evaluate the benefits against potential limitations like price competitiveness and product availability.

To help manufacturers build a consistent regional strategy through procurement, several targeted strategies can be implemented. 

Leverage local sourcing

Local sourcing offers numerous advantages, including reduced supply chain costs, increased flexibility, greater control over the supply chain, and faster, more reliable deliveries. It also supports the local economy and can enhance the manufacturer's reputation within the region.

How do you implement local sourcing? Identify and engage with local suppliers who can meet your quality and volume requirements. Consider the total cost of ownership when evaluating local versus national suppliers, not just the upfront cost. Local sourcing can also reduce environmental impact, contributing to sustainability goals, increasingly under the purview of procurement leaders. 

Adopt collaborative procurement

Collaborative procurement involves working closely with suppliers to create mutual value. This strategy can lead to cost reductions, process improvements and innovation. Engage key stakeholders early in the process, understand business requirements comprehensively, and develop a clear plan for collaboration with suppliers. This should include:

• Clear objectives and scope
• Identify roles and responsibilities for all stakeholders
• Needs assessment: understand the manufacturing requirements, evaluate the existing procurement structure, and identify areas for improvement or innovation. Benchmark against industry best practices to identify performance gaps
• Supplier selection and evaluation: Consider factors such as cost, quality, reliability, and the ability to innovate. Engage in a thorough market analysis to identify potential suppliers

Focus on supplier diversity

Diversifying your supplier base can mitigate risks associated with supply chain disruptions. Assess the regional supplier landscape and identify potential new partners that can add diversity to your supply chain. 

There is an opportunity here to also incorporate DE&I initiatives - leveraging the full spectrum of available talent and resources to drive innovation, competitiveness, resilience as well as brand reputation/value.

5 - Develop a strategic procurement framework for cost savings

Developing a strategic procurement framework is essential for leaders aiming to optimize their operations. A strategic procurement framework should include:

• A clear strategy statement
• Desired results
• Timeframe
• Tactical plan
• Measures for success

Utilize tools like TCO, SWOT analysis, and Porter’s Five Forces for comprehensive analysis. 

Execute the strategy with involvement from cross-functional teams. Monitor progress and refine the strategy based on performance metrics and feedback from stakeholders.

Conclusion

By implementing these strategies, procurement leaders in manufacturing enterprises can not only improve cash flow that supports sustainable growth and operational efficiency but also cut costs.

If you’re looking for a partner that can help streamline your indirect procurement, get in touch with DSSI. We help you streamline - saving time, money and resources by navigating one process instead of hundreds or thousands of individual suppliers, payment terms and invoices.