Cost saving initiatives and Chasing for cheap costs

From a category point of view, we think that procurement must look beyond the cheapest price yet tasked to drive down costs with cost saving initiatives like cost avoidance, working capital improvement etc. is that not in a nutshell chasing for cheap costs?

In my opinion chasing the cheapest cost is not the same as implementing cost reduction initiative within your procurement categories.

First of all, what is category management in procurement? It’s a strategic approach to procurement which involves classifying comparable goods and services into groups and treating them as strategic business units (Examples are IT category, Office supplies and Equipment, Stationery, Vehicle and Fleet category, special projects etc).

It also involves the development of category portfolio for each category which include among others category spend analysis and strategic sourcing strategies. The total category spend will determine the sourcing strategy and the cost reduction initiatives to be implemented to ensure cost savings within the category.

Category management and cost reduction initiatives are closely related strategies within procurement aimed at optimizing spending, enhancing efficiency, and driving savings across various procurement categories. It also involves using strategic sourcing techniques to find ways to reduce costs and improve supplier relationships within particular categories.

Although reducing costs is a goal shared by both cost reduction initiatives and selecting the lowest cost in procurement, however, there are important distinctions between the two:

Cost Reduction Initiative:

Firstly, initiatives for cost reduction entail methodical and planned attempts to identify, evaluate, and optimize costs across the category. This is more a strategic approach

Secondly, the goal of cost-reduction initiative is to maximize value while minimizing expenses rather than just looking for the cheapest price. It entails streamlining procedures, increasing productivity, and improving quality.

 Furthermore, cost reduction initiatives have a long-term position and seek to gradually achieve sustained cost savings. To increase efficiency and value, this may entail making investments in technology, supplier partnerships, and process enhancements.

Lastly, cost reduction initiatives take into account the wider effects of cost-cutting strategies on the performance of the organization spend as a whole, taking into account factors like quality, dependability, and risk management.

 Selecting the Cheapest Cost on the other hand

Firstly, focus on the immediate cost without taking into account the Total Cost of Ownership. Selecting the cheapest cost in procurement may focus on the immediate cost savings above other considerations such as quality, reliability, or long-term value.

Secondly, there may be trade-offs when you select the lowest price in terms of service quality, supplier dependability, or product quality. In the long run, there can be hazards or hidden costs even though there might be short-term savings. The focus on selecting the cheapest cost may be short-sighted, neglecting opportunities for long-term value creation or process optimization.

Lastly, selecting the cheapest cost may focus solely on price comparisons without considering other factors such as total cost of ownership, supplier capabilities, or market dynamics.

In conclusion, while reducing costs is the goal of both cost reduction programs and selecting the lowest cost in procurement, their approaches are different in terms of strategy, value, perspective, and wider consequences. While selecting the cheapest option may prioritize short-term cost reductions without taking other considerations or long-term implications into account, cost reduction programs prioritize sustainable cost savings, value optimization, and long-term performance improvements.

Simon Annan Chartered FCIPS, FIPMP, FGIPS, MCILT, MBA , Atoapem Frimpong Barimah FCIPS, CMILT, CFrA, CCIP, Dr. Ekow Taylor MSc, MCIPS, CMILT, CCMP, PgDip,HND Harry Kwakye Davies,