Cost Reduction in Procurement and Performance KPIs: Why Companies Are Shifting from “Cost Killing”, based on headline or sticker price, to a focus on Value Creation

For a long time, the performance of the procurement function was reduced to a single objective: achieving cost reductions. In many organizations, a buyer’s success is still measured by the percentage of savings negotiated. But this model is now reaching its limits.

In a climate marked by inflation, commodity price volatility, geopolitical tensions, and supply chain disruptions, lowering a price does not guarantee better overall performance. In fact, the opposite is often true: “The cheapest option is rarely the cheapest!”

The most forward-thinking companies are now adopting a different approach: they measure overall value creation, rather than just short-term savings. They are increasingly thinking in terms of total cost of ownership (TCO), with a focus on integrating CSR criteria into the evaluation of products and suppliers. They are seeking 3xPerformance.

It is precisely within this transformation that the approach developed by POCKANN Consulting fits, combining procurement expertise - extended to the supply chain - with the Impact³ x Cortex method, an agent-based AI for procurement analysis.

Selecting the cheapest supplier - based almost exclusively on this single, overemphasized criterion - often leads to costly and invisible short-term consequences:

• decline in quality

• increase in non-conformities

• supply disruptions

• longer lead times

• rising logistics costs

• administrative overhead

This erodes your organization’s efficiency, its financial profitability, and your teams’ motivation. It can also lead to customer dissatisfaction, which damages a business relationship that was previously healthy and sustainable. All this for a few euro cents per kilogram that you didn’t want to pay!

At POCKANN, we call this “the price of fuck-ups!”: it’s a bit crude, but everyone gets it. And this price is always greatly underestimated—always.

Example 1: A Transportation Company

The company secured a 15% price reduction on a technical part during the overhaul of its trucks, following a vehicle maintenance request for proposals.

The result six months later: non-quality costs rose by 12% because this part failed on several vehicles, which had to be repaired and were then out of service for several days.

Example 2: Institutional Food Service

A cheaper food supplier leads to fluctuations in quality and a string of issues with delivery punctuality, which delays the start of production. Some products are rejected and must be redelivered in compliance the next day. The internal disorganization eventually becomes apparent and leads to customer dissatisfaction.

The takeaway from the following year: across all customer segments, sales volumes dropped by 10%, and a major contract was lost in a competitive bid process without the company really seeing it coming.

In both of these scenarios, the chain of events is the same.

Supplier complaints and returns are no longer rare. As a result, we’re devoting more resources and time than is reasonable to the acceptance inspection process. This isn’t managed using clear KPIs. We’re working blindly and don’t see the situation deteriorating. However, the teams feel the impact every day.

Returns waste time and create a risk of stockouts—or even actually bring production to a halt. In this case, it’s even worse. Because it would be too costly to shut down the production line, we end up accepting the product in exchange for a discount. That discount will never cover the cost of lost time, the parts discarded as scrap, or the decline in your product’s quality. That’s when you enter a vicious cycle of deteriorating quality in both your service and your products.

This always ends up becoming apparent to your customers… without fail. Some customers complain, and you handle it. But the worst are the customers who say nothing but quietly reduce their orders—and whom you eventually lose. Conclusion: a visible cost savings can mask a very high overall cost.

The question the buyer and their superiors must ask themselves is: Is this really a cost savings?

• It ignores ancillary costs

• It undermines supplier quality

• It weakens the supply chain

• It disrupts operations and creates operational risks

• It undermines customer service

• It stifles innovation

The most effective procurement departments now think in terms of full cost or total cost of ownership (TCO), which includes:

• purchase price / list price

• logistics management / on-time delivery, cold chain, regulations

• storage / impact on cash flow, product shelf life, additional capacity

• quality / deviations from the specifications at the time of order

• maintenance / ancillary costs to be annualized over the equipment’s lifespan

• costs of non-performance / lost time and resulting disruption

• supplier risks / recurring supplier evaluations

• CSR impacts / positive or negative for the company and its image, its employees, and society

Traditional metrics—such as negotiated savings; number of suppliers; and procurement coverage rate—are no longer sufficient.
These KPIs measure the procurement budget rather than actual performance. Leading procurement departments are now tracking a new generation of procurement KPIs focused on the following areas:

• total cost of ownership (TCO)

• supplier quality performance / periodic supplier evaluations

• service level / OTIF

• supplier risks / financial stability

• supply chain resilience

• social and societal impact

• environmental impact / decarbonization of procurement (Scope 3 Carbon Footprint)

• supplier innovation

• value created for the company / objective and subjective (e.g., a positive image that attracts the attention of new talent to recruit)

For strategic management, data management in advanced Procurement departments enables the tracking of specific strategic KPIs that are more relevant to executive committees. Examples:

• Procurement’s net contribution to results

• Impact on operating margin

• Reduction of critical risks to the business

• Improvement in supply chain cash-out

• Stability of supply

Agri-food procurement involves:

• volatile raw material prices

• health and safety constraints

• logistical pressures related to just-in-time operations and temperature-controlled storage

• dependence on suppliers in markets that are often structurally supply-constrained

• seasonal fluctuations in supply

Example: A Fish Wholesaler

A company reduced its fish procurement costs by 8% through opportunistic purchases from unknown and unlisted suppliers. At the same time, it increased its product losses by 10% due to lower-quality products, but without proper monitoring, it failed to realize this.

The inconsistent sizes of these batches created difficulties in the production line in meeting the customers’ specifications. This led to several product returns and inventory of products that were difficult to sell.

All told, after several months of operation, the financial loss amounted to more than 25%. Result: 8% gained – 25% lost = a 17% net loss in actual profitability, despite an initial margin that appeared much better.

Indirect purchasing often accounts for 20 to 30% of total spending… but remains poorly structured.

Energy, maintenance, IT, temporary staffing, transportation and storage, and professional services: In many small and medium-sized businesses, savings of 10 to 15% are possible without changing suppliers. Simply by encouraging a bit of competition through a request for proposals, companies can realign their costs with the target market price.

The Impact³ method allows you to evaluate all or part of your targeted procurement categories.

We support your teams in collecting your own internal data and structuring procurement processes to analyze your own operations. We do this not only during our engagement but, more importantly, after the project is complete. To this end, we can train your teams to ensure a gradual transfer of knowledge and expertise.

Organizations have data, but not always the capacity to analyze it. The 360° dashboard incorporates financial, social, and environmental criteria.

The Cortex agent-based AI enables a comprehensive and rapid analysis of your categories and provides strategic matrices to prioritize your objectives and structure your procurement projects to be deployed first:

• automatic expense analysis

• detection of supplier anomalies

• procurement scenario simulation

• KPI consolidation

• negotiation preparation

• overall cost calculation

Case Study - Food and Beverage Industry

• Before Cortex: 3 weeks using Excel for data consolidation and strategic analysis

• After Cortex: 3 days to identify 18% in potential savings on the expense budget and the optimization levers to activate to achieve them. AI also helps prepare the RFP and evaluate the responses afterward!

Before any optimization, it is essential to understand:

• the structure of procurement categories and the client’s specific characteristics (multi-site operations, external growth)

• the organizational structure (Procurement vs. Supply Chain, ad-hoc purchasing, team maturity)

• the maturity of KPIs (existence, relevance, data management in place)

• supplier dependency (identifying single-source, long-standing, and strategic suppliers)

• hidden opportunities (all hidden savings, often in indirect procurement)

The POCKANN assessment allows you to quickly map out these dimensions.

The nature of the procurement function is changing. Sustainable Procurement is another way to achieve cost savings in a more ethical and sustainable manner.

It is no longer limited to reducing costs. Today, it drives spending by generating 3xPerformance and leverages AI. The most successful organizations no longer seek to buy cheaper, but to buy better, more intelligently, and in a measurable and eco-responsible way.

Using the Impact³ x Cortex method and agent-based AI, POCKANN Consulting supports this transformation, bringing to light these drivers of economic performance that are often hidden within traditional organizations.

Would you like to identify your procurement performance drivers?

• Discover our areas of expertise: Indirect Procurement | Agri-Food Procurement | Supply Chain

• or contact us directly for an assessment