March 25, 2026

Procurement Savings And Its Types

Regardless of Industry category, enterprise size, or the maturity of procurement practice and discipline, evaluating cost savings remains the top priority of the procurement function. As a fact, the percentage of revenue expenditure in recent times for most enterprises has increased to 50-70% on procurement function concerning the type of business. This upward trend originated due to continually outsourcing of in-house tasks and increased responsibility of managing a greater spectrum of tasks/commodities such as insurances, contracts, business travels, professional services, marketing, and communications, etc.

In the case of large corporations or enterprises, a 5-10% reduction in maverick spending can yield millions in profit/savings. Hence, procurement hugely impacts the profitability of a company.

Controlling cost is a shared responsibility of both the procurement and finance departments. These departments need to work in cooperation to be aware of each other’s frame of reference. Generally, the point of reference to savings is deduced as a decrease in costs by finance professionals, which might not indicate the exact scenario or cost-saving efforts made by procurement professionals. To understand this statement, let’s dive deep into the concept of financial savings in procurement operations and starting with various types of procurement savings.

Types of savings from a procurement perspective

Fundamentally there are three major aspects to consider for curtailing costs in respect to procurement. The three broad aspects are the demand side, the supply side, and the overall/total cost side. Let’s explore all the major aspects of cost savings in detail –

1) Purchase Demand Management – indicates decreasing the demand to achieve cost savings. This further can be done in the following ways –

Reducing Consumption – There are certain times when every organization has purchased goods/items that they could do without. During economic growth, such expenses often increase and decrease during a slowdown or unfavorable situation. Therefore it's crucial to efficiently manage consumption and improve spending quality as per need basis. For example, during Covid-19, businesses have been dealing with a rare and unfavorable situation which forced companies against air travel for business-related purposes and adopt an alternative - video conferencing.

Consolidation of expenditure by improving or innovating product - Another interesting way to minimize expenditure could arise from certain modifications or harmonization of specifications that could lead to significant savings. Some examples are – one-size fits all ideology inception, technological developments, outsourcing for a cheaper alternative, collaborations to infuse new and cheaper innovations to the product, etc. Continued development not only helps in saving costs but also helps in staying ahead of the curve by catering to the latest demand trends in the market. The procurement function extensively helps in identifying such key areas for improvements and enhances the scope for cost-saving opportunities.

2) Supply Base Management – Conventionally supply side is deeply associated with procurement and supply base management is all about saving costs related to supplier deals. Let’s explore the following ways to curtail costs SBM –

• Restructuring Supplier Relationships – The numerous underlying factors driving the need for supplier management in this highly competitive business world are ever-increasing operational scale and complexities of supply chains, growing value-chain risks, supplier data management, establishing long-term supplier relationships, leveraging supplier relationships, and matching industrial standards of supplier performance. It’s also important to maintain and manage supplier relationships as they are crucial when it comes to negotiating contracts to achieve the best deal possible. To gain additional advantages, collaboration and partnerships often help to achieve improved cost savings.

• Increase Competition – On the contrary to restructuring supplier relationships, onboarding more suppliers to increase the competition amongst them helps in achieving favorable pricing terms/deals.

• Alternative Suppliers - Hunt for alternatives should always continue as the opportunity to brag better deals may come at any time and it can help you avail multiple sourcing options to maintain stiff competition amongst suppliers. It ultimately leads to a price-war between suppliers to increase cost savings.

3) Total Cost Savings - Some common ways to save costs are, decrease in demand or reduction of direct purchase expenses. The other possible method to lower costs can be addressed by re-evaluating total costs related to the acquisition of products and services (TCO – Total cost of ownership). Let’s explore some ways to reduce the total cost of ownership –

• Optimize Total Supply Chain Costs -In recent times this area has enormously expanded and all credits to methods like Kaizen, Just-In-Time (JIT), Kanban, and Six Sigma for helping enterprises to lower their TCO.

• Reduce Total Life Cycle Ownership Costs – This relates to any additional costs concerning the product price. Certain considerations are required to help reduce the total costs, such as whether to purchase a standard product instead of inventing/developing a unique part, or leasing a product rather than buying, or sharing ownership of installations with other parties, etc. Such decisions are crucial to lowering the TCO and directly impact the profitability of the product

Decrease Transactional Costs – Costs related to ordering, receiving, and making payments are often overlooked. To minimize the leakage and increase cost savings there are e-procurement tools that can help you manage costs related to vendor management. Such tools help you facilitate trade with ease and in a cheaper manner.

By now, you must have understood the various types of possible procurement saving opportunities and where can we divert our efforts to help the cause more efficiently. So this was all about the various types of procurement savings and in the next blog, we’ll discuss the numerous complexities that exist while realizing procurement savings. So, stay tuned!