Reducing costs is a critical focus for many B2B companies, yet it’s often seen as a painful process. Managers are wary of imposing cuts that might upset employees, disrupt operations, or compromise quality. However, there’s a strategic way to begin cost reduction that is largely painless and highly impactful: starting with suppliers.
Many managers feel the imperative to cut costs but hesitate to impose “pain” on their organization. The most painless and effective way to reduce costs is to aggressively manage the prices paid to suppliers for goods and services.
Suppliers represent a significant opportunity for cost savings. Significant savings can be realized with relatively little effort. Consider this: what percent of your business’s total cost is comprised of purchased goods and services? For many companies, this can be as high as 50% or even 70%, and rarely below 20%.
For example, if purchased goods and services (also called procurement or purchasing) equal 50% of your total cost, achieving just 8% savings translates into roughly four margin points added to your bottom line. That small adjustment can have a huge impact on profitability.
One of the reasons purchasing represents such a significant profit opportunity is that it is often ignored by managers. Managers focus on customers, revenue, and employees; they naturally prioritize areas where they feel they have the most control or visibility. Purchasing is sometimes dismissed as a minor administrative function, “Joe’s problem” to handle.
Ask yourself this question: “If you were offered a million-dollar bonus for raising your margin by two points this year, would you achieve it by making customers pay more or by getting suppliers to charge less?” Most managers instinctively answer “suppliers.” This highlights a common gap: businesses are often not managing supplier costs as aggressively as other areas, even though this is where the largest and easiest gains lie.
Imagine a mid-sized manufacturing company producing industrial containers. On the first day consulting for them, the operations head instructed: “Cut costs in the plant.”
During an initial tour, we reviewed cost distribution with management. I asked:
“What percent of your cost is manufacturing and what percent is purchasing?”
They discovered that purchasing components, raw materials, and packaging accounted for 75% of total costs. Manufacturing operations themselves represented only 15%, and administrative costs were 10%.
I then asked:
“When was the last time you studied ways to reduce manufacturing costs?”
They replied: “We review it every few years.”
“And purchasing costs?”
They answered: “We let the procurement team handle it; we trust them to negotiate.”
Here’s the math: a 5% reduction in purchasing costs lowers total costs by 3.75% (5% of 75%). To achieve the same savings from manufacturing, costs would need to be cut by 25% (25% of 15% = 3.75%), which is highly challenging.
By focusing on supplier pricing and procurement practices, the company realized a 7% reduction in purchasing costs, translating to a 5.25% reduction in total costs. This small adjustment had a major impact on profitability and created momentum for further strategic savings initiatives.
By beginning with suppliers, small B2B companies (10–100 employees) can implement cost reductions quickly and efficiently, with minimal disruption to employees and operations. The best part is that these savings are tangible and directly boost profitability, setting the stage for more strategic cost initiatives down the line.