How can a mid-sized or large company reduce procurement costs?
Procurement costs can be reduced in three ways: by paying less for what is bought, by buying the right things, and by spending less on the act of buying. Most companies know the measures. What they lack is the volume, the capacity and the facts to carry them out.
The short answer
Five measures have the greatest effect, and they work best together:
- Consolidate volume with fewer suppliers and across fewer articles.
- Put each category out to tender at article level, and renegotiate at every price change.
- Make sure the agreements are actually used.
- Use the transaction data as the fact base for the next tender.
- Combine volume with other companies when the company’s own volume is not enough.
The rest of this article explains each measure, what it requires, and the routes a company can choose to carry them out.
Why it pays to start with procurement
For many companies, purchased goods and services are the largest cost item in the accounts. As an order of magnitude, purchases of goods and services correspond to around 75 per cent of turnover in manufacturing and around 70 per cent in construction, while personnel costs account for around 17 and 25 per cent respectively (assumption based on Norwegian structural business statistics for 2024). Every euro saved goes straight to the bottom line, without the company having to sell more. Even so, procurement rarely receives the same attention from the board and management as sales and revenue. The reasons are described in Procurement: the cost base the board spends least time on.
1. Consolidate volume
Volume spread across many suppliers weakens the negotiating position in every single negotiation. Fewer suppliers per category and a standardised product range give the supplier a volume worth competing for, and give the company fewer relationships to manage, fewer articles and lower inventory and administration costs. Standardisation is also where the company buys the right things: much of the cost is determined by the specification, long before the price is negotiated.
2. Put each category out to tender
An agreement is never better than the competition in which it was concluded. Each category should be put out to tender or renegotiated at regular intervals, specified on the basis of what the company actually buys, and priced per article. A percentage discount on a list price (recommended price) that the company does not control says little about what is actually paid. This is explained in Article-level prices instead of percentage discounts on an unknown price level. Nor does the work end on signature: prices change during the term of the agreement, and every change must be checked and, where necessary, renegotiated. What happens when nobody does so is described in The crocodile effect.
3. Make sure the agreements are used
A negotiated price is worth something only when it is used. In many companies a large share of purchases is made outside the agreements, because it is easier to order as before. One shared purchase to pay flow, in which ordering, approval, goods receipt and invoice matching are handled in one place, makes the agreement the easiest route. The agreed price then becomes the price actually paid, and the cost of each order falls.
4. Use the data
The supplier knows what all its customers pay. The buyer knows only its own price, and often only at invoice level. Transaction data at article level corrects the imbalance: it shows what is bought, at what price and how the price develops, and it gives the next tender a fact base instead of an estimate.
5. Collaborate when the company’s own volume is not enough
Even large companies lack the volume in many categories to reach the best prices, and few have the capacity to put everything they buy out to tender. The solution is then to combine volume with other companies. This is known as collaborative purchasing: independent companies negotiate their purchasing volume as one and share expertise, a platform and a fact base. Competition rules do not prohibit such collaboration in itself. What matters is how the collaboration is set up, including that it is kept upstream in the value chain, towards the suppliers. The framework is described in Is a procurement collaboration legal?
Four routes to implementation
The five measures can be carried out in four ways. Most companies combine several of them.
| What it offers | What it requires | Limitation | |
|---|---|---|---|
| In-house procurement function | Full control and proximity to the company’s needs | Category expertise, analytical capacity and systems in-house | The volume is the company’s own, and capacity rarely stretches to every category |
| Procurement consultancy | Rapid effect in selected categories, with external methodology and capacity | A defined project and internal follow-up afterwards | A one-off effect. The volume is still the company’s own, and the savings erode without follow-up |
| Traditional GPO (purchasing central) | Quick access to pre-negotiated agreements, with a low barrier to entry | Little. The customer chooses from a catalogue | A discount on the list price rather than a price per article, and little influence on the agreement |
| Procurement collaboration (collaborative purchasing) | Combined volume, shared expertise, a shared platform and a shared fact base | Commitment to the agreements and participation in the tenders | Requires that several companies want the same thing. The gain comes category by category |
The routes are not mutually exclusive. A company with a strong procurement function gains more from a collaboration, because it knows what to demand. The difference between the last two routes is described in Procurement collaboration or GPO: what is the difference?
Three questions that show where the company stands
What share of the purchasing volume has been put out to tender in the last three years? What share of purchases is actually made under the agreements? Does the company know the price per article, and how it has developed since the agreement was signed? If the questions can be answered with figures, the company knows where the potential lies. If they cannot, the first measure is to obtain the facts.
Aitenda
Aitenda is a strategic alliance between independent companies, organised as a strategic procurement collaboration. The members combine their purchasing volumes, and Aitenda negotiates them as one, category by category, at article level. Every member receives the same prices and terms, orders through aitenda.net and owns its own data. The five measures are thus carried out in one model.