Non-strategic procurement costs are often overlooked. Companies can increase their profit margin 2 percentage points by correctly managing these costs.
For many organizations, cost optimization measures focus mainly on squeezing out savings in strategic procurement (negotiating down costs of raw materials sourced) or tightly managing labor and staff costs. As these two categories account for the bulk of operating expenditure for most companies, aggressive cost negotiation makes sense. However, these two categories are also the least amenable to sustained cost control due to their susceptibility to market forces: With all competitors trying to gain the same competitive edge in direct sourcing costs, sustaining a long-term advantage requires a degree of negotiating leverage that few firms have.
Meanwhile, often overlooked, is the saving potential in indirect or non-strategic procurement. Indirect procurement accounts on average about 10% of revenue, and while this is dwarfed by direct procurement, the savings potential is not insignificant.
Khareed’s analysis of the procurement spending of more than a hundred large manufacturers and assemblers indicates potential to reduce indirect procurement costs by 15% on average through improved sourcing and better demand management. A further 5% of procurement spend can be saved simply by improving processes and minimizing dependence on a fleet of purchase agents. This can translate into net savings equal to a hefty 2% of revenue, a not-insignificant cost reduction for the many commodity-oriented businesses that comprise Pakistan’s large scale manufacturing sector.
There are 4 areas we recommend tackling in order to minimize indirect procurement spend:
Khareed’s Prism™ e-Procurement module is designed to enable companies to manage each of these 5 areas of their procurement operations to minimize their costs, increase their visibility on their spend, and make procurement easier and more efficient. More than a hundred large corporate enterprises across Pakistan are currently using our procurement solution to run their day to day procurement and save time and money at the same time.
If your organization could benefit from using a procurement transparency solution that is tailored for the needs of the Pakistan market, please get in touch with us and we will schedule a meeting to see how we can help you.