Cost Reduction Techniques in Procurement & How to Use Them
Cost Reduction Techniques in Procurement & How to Use Them
High procurement costs are a hidden profit-killer. Indirect costs and unexpected fees can drive your total expenditure beyond breaking point—even when you find the goods you need at the perfect price.
Procurement’s role is to optimize company spending. But you can only achieve this by implementing the right processes and techniques within the function itself.
Here you’ll find 11 of the most effective short-term and long-term cost reduction techniques in procurement. These tactics are designed to help you improve profitability and drive more value from your procure-to-pay processes.
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When to look into cost reduction in procurement
In a recent survey of procurement leaders, 62% of respondents cited inflation and higher costs as the biggest challenge in procurement in 2025, while another report by The Hackett Group listed “improve spend cost reduction” as the number one priority for the previous year.
Economic downturns and supply chain disruptions are common catalysts, but there are other signs that the cost of procurement is hurting your business.
Indicators you need to reduce your procurement costs include:
- Declining profit margins
- Rising cost of goods sold (COGS)
- Frequent budget overruns
- Cash flow problems
- Excessive maverick spending
- Pressure from investors or the board of directors
A few hidden clues can also reveal a need to reduce procurement costs, even if they don't show up on a balance sheet. A lack of spend visibility, reliance on manual processes, and a fragmented supplier base all signal that you could be overspending.
With the right approach, you can optimize your purchasing workflows and increase spend visibility to unlock even greater procurement savings.
Spend Analysis Toolkit
Unlock savings, improve supplier relationships, and make smarter procurement decisions with clearer spend insights. Download the ebook to get started.
6 short-term cost reduction strategies to try
Reducing your short-term procurement costs enables you to work on longer-term strategies that strengthen your supply chain resilience. The following cost avoidance techniques typically yield results in a few months or less, making them useful for alleviating pressure from external investors or upper management.
Reduce or defer non-essential purchases
When budget oversight slips, non-essential purchases can start to build up. Eliminating or delaying unnecessary expenses is the most direct way to reduce your procurement costs without affecting your core operations.
Examples of non-essential purchases include:
- Unused or redundant software subscriptions and upgrades
- Premium-branded office supplies
- Company-wide hardware upgrades
The best way to find these is through a rigorous review of your purchase requisitions. Identify which non-essential purchases are draining the most cash and begin there. Consider creating a list of deferred purchases you can revisit when your financial situation improves.
Review or renegotiate supplier contracts
Static supplier contracts are a magnet for missed opportunities. As market conditions, purchasing volumes, and supplier competitiveness change, your contract terms should evolve accordingly.
Start by benchmarking your current rates against market data and competitor pricing to ensure you’re getting the best value for your purchases.
If cash flow is a problem, try negotiating more advantageous payment terms, like switching from net 30 to net 60. Establish a review timeline that prioritizes high-value and soon-to-expire contracts so you can update supplier terms and capture savings.
Centralize procurement processes for better oversight
Decentralized procurement activities lead to teams purchasing the same supplies from multiple vendors at varying prices. This weakens your financial visibility and supply chain forecasting accuracy, resulting in poor purchasing decisions that increase your total procurement costs.
Centralized procurement processes help you cut costs and save time.
Let’s say you have 12 retail stores that use different suppliers for the same goods. By centralizing this spend, you could renegotiate more profitable contract terms while standardizing product quality. Centralization also helps you further reduce procurement costs by minimizing the amount of invoicing and admin work associated with that product.
Establish a central procurement team that handles strategic sourcing, and create a company-wide purchasing policy that enforces alignment between different departments. Leverage cloud technology and software integrations to establish a single source of truth for all your spend data.
Control or eliminate maverick spending
Maverick spending, also known as rogue spending, is when your employees make purchases that don’t adhere to company policies or contract terms. These purchases often lead to higher procurement costs and undermine your existing spend management strategy.
Common examples of maverick spending include:
- Using personal credit cards for company purchases
- Purchasing goods or services from non-approved suppliers
- Purchasing goods or services without using a purchase order
Conduct spend analyses regularly to identify instances of maverick spending and address the root causes. Implement an easy-to-follow system that users understand to simplify the procurement process and reduce the likelihood of your staff making non-approved purchases.
Use fewer suppliers for volume discounts
Increasing your expenditure with specific suppliers is the easiest way to negotiate better terms in your supplier contracts. By consolidating purchases with fewer suppliers, you gain leverage for better volume- and loyalty-based discounts while also reducing the burden of supplier relationship management (SRM), invoice processing, and contract management costs.
Conduct a spend analysis across categories to uncover supplier consolidation opportunities. Identify items purchased from multiple vendors, compare performance and total costs, and shift to a single supplier for same-category items whenever possible.
Leverage competitive bidding among suppliers
A competitive bidding strategy helps you get better pricing and terms by encouraging suppliers to offer the best deal to win your business.
Clearly define the exact specifications of the goods or services to ensure a fair comparison between offers. Be transparent and unambiguous about your criteria for evaluating bids to minimize the risk of contract disputes and protect your existing supplier relationships.
5 proven long-term cost reduction strategies
Long-term cost reduction techniques typically require larger investments, but they produce more sustainable results. The following tactics will help you establish an evergreen procurement strategy that generates more value and minimizes procurement costs over time.
Implement category management
Category management is the process of segmenting spend into specific categories to achieve more granular procurement visibility and optimize your purchasing decisions.
To implement category management in procurement, follow these steps:
- Needs assessment: Analyze spend performance for goods and services that fall under the same category to understand your organization's needs.
- Spend analysis: Analyze historical spending patterns for high-value categories to develop a strategy for category segmentation and budget allocation.
- Category plan: Attribute a key stakeholder to each category and assign responsibilities for building, monitoring, and improving a category plan that aligns with your core business objectives.
- Prioritization: Establish a hierarchy by prioritizing each category based on the value it delivers to your business. The Kraljic Matrix is a useful tool for strategic category prioritization based on supply risk and profit impact.
Spend management software is your saving grace when it comes to category management. It unifies all your purchasing data, allowing you to automate your procurement process and conduct detailed cross-category performance analyses.
Continuously monitor data analytics for spend visibility
Procurement analysis provides the blueprint for effectively reducing your procurement costs. It’s essential for establishing full visibility into your spend data and identifying opportunities to lower costs and strengthen your bottom line.
Invest in a spend management platform with built-in analytics dashboards to regularly monitor spend and compliance against performance targets. Pay close attention to metrics that directly impact your total procurement costs, such as maverick spending, contract compliance, and supplier performance.
Optimize inventory management using forecasting tools
Inventory management is one of the biggest cost centers in businesses that deal with physical goods. Inventory shortages tie up your available capital and lead to additional operational costs, while inventory stockouts result in missed sales opportunities.
Prioritize accuracy when forecasting ideal inventory levels and reorder times based on historical sales performance, supplier lead times, and on-hand stock levels.
Develop strategic supplier relationships
Supplier relationship management is the process of strategically segmenting your supplier base and developing mutually beneficial relationships with your most important suppliers.
Key functions of strategic SRM programs include:
- Supplier segmentation: Categorize your supplier partnerships based on their importance, reliability, and spend to prioritize the most critical vendor relationships.
- Senior leadership buy-in: Meet with senior leaders from your organization and supplier companies to strategically align on shared goals.
- Formal reviews: Conduct regular meetings to review supplier performance, adjust strategies, and plan new initiatives. Consider implementing supplier scorecards to support these reviews and compare vendor performance.
To minimize disputes and ensure both parties are satisfied with the relationship, establish clear communication channels, a regular meeting cadence, and performance expectations.
Invest in procurement automation and e-procurement technology
Procurement software improves the efficiency of strategic initiatives by automating manual tasks in the procure-to-pay lifecycle.
Using technology, you can accelerate the purchase requisition process, reduce indirect procurement costs, and gain access to better eprocurement and accounts payable automation services.
Research shows AI-driven spend management can enable up to a 20% cost savings rate with little to no involvement from procurement professionals. Procurement automation tools also allow you to accurately forecast your needs using real-time spend data. This helps you establish tighter budget control and improve supply chain resilience.
Spend Analysis Toolkit
Unlock savings, improve supplier relationships, and make smarter procurement decisions with clearer spend insights. Download the ebook to get started.
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The road to and impact of procurement cost reduction
By optimizing process efficiency and unlocking more cash flow, procurement savings produce more flexible risk management that supports long-term growth.
EPIC4, an orthodontic and pediatric dental firm, struggled with high procurement costs due to fragmented purchasing and manual invoicing processes. To solve this problem across its 55 dental offices, the company implemented Order.co’s AI-powered spend management software.
Order.co transformed EPIC4’s procurement process from a manual, time-consuming system to a fully automated and centralized system, resulting in a 50% decrease in time spent on procurement processes.
“We have 26,000 products loaded on the platform,” Sam said. “Everything is there that you need. Every order that you place through the platform flies through seamlessly, and you don't have to touch it anymore.”
Centralized purchasing means EPIC4 can now leverage spend analytics and timely payments to negotiate more favorable terms. On-time payments and better contract terms have also improved working capital.
How to calculate procurement cost savings
Cost-saving strategies fit into one of two categories:
- Hard savings: The tangible price reductions for supplies achieved through cost reduction techniques
- Soft savings: Intangible savings achieved through the prevention of future cost increases and more efficient procurement processes
Use this formula to measure hard savings over a specified period:
(Baseline Price – New Price) × Volume = Savings
To perform this calculation, start by establishing the baseline price—the last price paid for the same item. Next, determine the new, lower price you’ve negotiated using your cost reduction techniques. Then, use historical data or forecasted demand to calculate the volume of goods purchased or expected during the measurement period.
How Order.co helps reduce procurement costs
Effective procurement cost reduction requires the right support to be successful. Order.co's comprehensive spend management platform helps you tackle the core challenges that drive up procurement costs, delivering measurable savings through intelligent automation and strategic sourcing.
With Order.co, you get:
- Real-time spend analytics and reporting that reveal hidden cost-saving opportunities across all categories and suppliers
- Automated sourcing that compares prices across your supplier network to help you secure more cost-effective vendors and service providers
- Customizable approval workflows that eliminate maverick spend and ensure all purchases align with your cost reduction strategy and company policies
- Access to extended payment terms and cash flow optimization, such as net 30, net 60, and capital advances
If you’re ready to simplify your procurement process and take advantage of better procurement cost performance, schedule a demo of Order.co today.
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