How to Build a Procurement Cost Reduction Strategy: Short-Term Wins Through Long-Term Savings

Procurement cost reduction is the practice of lowering total procurement expenditure through targeted strategies.  It includes re-negotiating contract terms, improving administrative and operational processes, eliminating unauthorized spending, and applying data and technology to purchasing decisions. 

Procurement cost reduction extends beyond achieving lower unit prices. It encompasses the full spectrum of savings opportunities across the procurement lifecycle, from contract management to supplier rationalization to risk mitigation.

These actions require thought, planning, and possible resource investment. However, they have the potential to pay off much more in the long term!

The following table summarizes all 11 procurement cost reduction strategies organized by implementation timeline.

Short-term initiatives and quick wins

Short-term procurement cost reduction strategies can be implemented within weeks or months. These strategies deliver measurable savings with relatively low investment in resources.

1. Revisit current contract terms

It’s an acceptable practice to challenge the terms of an existing contract. Any contract not reviewed for more than 3 years should offer opportunities for savings and there is scope to revisit payment terms. 

Economic conditions, consumer consumption patterns, and technology evolve over time. Pricing that was competitive three years ago may no longer reflect current market rates. Market research and benchmarking provide the basis for renegotiation discussions with suppliers.

Adoption of technology is also influencing how organizations approach renegotiation. Gartner forecasts that 50% of organizations will integrate AI-enabled tools into their contract negotiation processes by 2027.

How to revisit contract terms effectively

• Identify all contracts not reviewed within the past three years.
• Conduct market research and benchmarking to establish current fair-market pricing.
• Open discussions with suppliers about purchasing frequency changes that unlock volume discounts.
• Use procurement analytics to track and compare payment terms across contracts.

2. Challenge Product and Service Specifications

Challenging specifications means questioning whether a product or service is necessary at its current level of detail, and then reviewing the specification or design based on actual need. Product specifications and packaging are often based on supplier proposals or tailored to a single supplier or brand.

Product specifications and packaging are often based on supplier proposals or set for a particular supplier or brand.  Requirements based on expected performance or outcome allow for increased competition by a broader range of suppliers. 

How to challenge specifications effectively

1. Ask whether the product or service is necessary at all.
2. Analyze the extent of the actual need.
3. Rewrite specifications based on required performance or outcome rather than brand.
4. Open the revised specification to a wider supplier pool.

3. Eliminate Maverick Spending

Maverick spending is unauthorized purchasing that occurs outside of agreed contracts. Maverick spending is also referred to as rogue spending or spend leakage.

Maverick spending can account for a significant percentage of total purchases in organizations that lack a centralized purchase-to-pay (P2P) procurement process.

Maverick spending bypasses negotiated terms, resulting in the organization paying higher prices than necessary. Eliminating maverick spending redirects expenditure back into contracted channels where pricing has already been optimized.

How to eliminate maverick spending

• Conduct a full spend analysis to identify all unauthorized purchasing.
• Implement or strengthen a centralized purchase-to-pay (P2P) procurement process.
• Introduce automated controls that flag or block non-compliant purchases 

4. Challenge Operational Costs

Operational costs in procurement include administrative expenses, transactional costs, documentation overhead, and emergency procurement actions caused by poor planning. Poor procurement planning leads to expensive last-minute purchases and inflated transport costs.

How to reduce procurement operational costs

• Implement proper procurement planning to ensure optimal use of administrative resources.
• Streamline internal purchase-to-pay (P2P) processes, whether automated or manual.
• Reduce unnecessary documentation and transactional steps 

5. Review Uncompetitive Suppliers

Reviewing uncompetitive suppliers means using benchmarking data from contract reviews to identify suppliers whose pricing is above current market rates.

Uncompetitive suppliers are then given the opportunity to reduce their costs or are replaced with more competitive alternatives.

How to review and manage uncompetitive suppliers

• Use benchmarking data to identify suppliers with above-market pricing.
• Approach uncompetitive suppliers with market data and request cost reductions.
• Remove suppliers who cannot match market rates and consolidate spend with competitive suppliers.
• Actively manage strategic supplier relationships and reduce the total number of suppliers.

6. Use Existing Procurement Data 

Clean, complete, and timely data is the foundation of every procurement cost reduction initiative.

Reliable information on past purchases and supplier performance highlights savings opportunities and supports re-negotiation efforts.

How to use procurement data for cost reduction

• Ensure procurement data is clean, complete, and updated regularly.
• Analyze historical purchase data to identify pricing trends and anomalies.
• Use supplier performance data to support evidence-based negotiation.

Medium-Term and Long-Term Cost Reduction Strategies

Medium- and long-term procurement cost-reduction strategies require greater planning, investment, and organizational commitment. These strategies deliver larger and more sustainable savings over time.

7. Investigate Outsourcing

Procurement outsourcing is a strategy in which non-core procurement activities or functions are transferred to specialist external providers.

Procurement outsourcing is especially suited to indirect procurement categories such as facilities management, security, transportation, and logistics.

What are the cost reduction benefits of procurement outsourcing?

• Lower costs through the outsource partner’s economies of scale by aggregating multiple customers’ requirements.
• Freed internal resources, because outsourcing low-value, high-volume purchases removes the burden from expensive in-house staff.
• Access to global expertise and market knowledge in categories where the organization lacks in-house capacity.
• Time-consuming negotiations and contracting are managed by external specialists.

8. Adopt Procurement Technology

Procurement technology reduces costs by automating manual processes across the procurement lifecycle.

Software solutions for purchase-to-pay (P2P), spend analysis, and artificial intelligence in procurement reduce human intervention in supplier onboarding, performance assessment, and day-to-day operational management.

For example, Deloitte reports that over 53% of surveyed CPOs prioritize generative AI for spend analytics and dashboards, while 42% use it for RFP/RFQ generation and 41% for extracting and summarizing contract terms.

Where does procurement technology deliver cost savings?

• Purchase-to-pay (P2P) automation reduces manual transactional costs.
• Spend analysis tools provide visibility into total expenditure patterns.
• AI-powered procurement tools automate supplier performance assessment and operational management.

9. Implement Category Management

Category management in procurement is the practice of grouping and managing each type of expenditure holistically across the entire procurement lifecycle. Implementing a category management structure requires careful planning but delivers significant long-term savings.

Category management allows procurement teams to focus time on strategic activities rather than repetitive transactional buying.

Why does category management reduce procurement costs?

Total spend on a commodity or service can be leveraged to offer larger volumes or expanded scope to key suppliers, driving down unit costs. Category-based analysis can highlight cost avoidance opportunities and potential quick wins.   

10. Centralise Procurement 

In a decentralized procurement structure, savings opportunities remain hidden. Decentralized procurement increases the likelihood of duplicate purchases and maverick spending, even in organizations with center-led global procurement. Centralizing procurement enables a unified global sourcing strategy. 

What are the alternatives to full procurement centralization?

Implementing a spend analysis tool globally can provide many of the same visibility benefits as full centralization. A rationalized supplier database leads to increased supplier competition and lower supply costs, regardless of whether procurement is fully centralized.

11. Reduce Procurement Risk

Holistic procurement risk management is the practice of ensuring that correct management controls are in place across all purchasing activities, with particular attention to ad-hoc and emergency purchases.

Dependence on a sole supplier for a critical item or service is one of the largest risks in procurement, and a mitigation plan should always be maintained.

How does risk management contribute to cost reduction?

Procurement risk management contributes to cost reduction through cost avoidance. Cost avoidance is a type of procurement savings that includes limiting the rate of price increases and extracting more value from existing contracts.

Cost avoidance is classified as a “soft saving” because it does not appear directly on the balance sheet, but it reduces total procurement expenditure over time.