Written by Marijn Overvest | Reviewed by Sjoed Goedhart | Fact Checked by Ruud Emonds | Our editorial policy

Procurement Cost — Importance and Examples

What are Procurement Costs?

Procurement costs are types of fees that are incurred to buy the necessary goods or services that are essential in the procurement process of your business. Since these are costs necessary for the business, it is integrated into the financial accounting of the company.

Usually, it serves as the key performance indicator of your company. This will help you know if your spending practices are for your company.

Additionally, it can help you evaluate and assess your approach when it comes to your procurement efficiency. Procurement cost provides a significant value in better understanding your company.

With procurement costs, you can indicate resource value, and how it affects your company’s position. Moreover, it can help you consider the decisions you take, when it comes to your company’s growth.

Knowing your procurement cost will help you navigate in your company.  More importantly, addressing different types of procurement costs can help you improve your competitive position.

I created a free, downloadable ABC-XYZ Analysis template. This PowerPoint file helps you gain valuable insights into your procurement costs. I’ve also made a video explaining how to use the template effectively.

Why are Procurement Costs Important?

Procurement cost enables you to easily understand your expenditures.  With this information, you can properly evaluate and determine your profitability.

A properly indicated procurement cost can help you make informed decisions, as the price allows you to calculate your spending.

Additionally, procurement costs can help you recognize possible spending opportunities, by knowing how much you can spend.

This can also help you with deciding how you will approach suppliers. Oftentimes, suppliers incorporate procurement cost reduction to make their deals enticing.

On the other hand, Companies formulate their strategies depending on various procurement costs. It can help them arrive at optimal deals, while not jeopardizing the quality of their procured goods and services.

Procurement Cost Examples

Knowing the types of procurement costs can help you better manage your company’s expenditures. Cost mismanagement debilitates your company and leaves it in a bad position.

It is always important to know which to address, so you should know how to address it. The types of procurement costs are as follows:

1. Base Cost 

The base cost refers to the cost of a good or service before adding the consideration of a price and sale. It allows the determination of whether there is profit or loss. In other words, it’s the first purchase price, which can be adjusted over time. 

For example, the price paid to a supplier for only the raw materials, such as $1,000 for 50 units of steel used in automotive manufacturing. 

2. Transportation Cost 

The transportation cost is the cost of the logistics operation that transfers the goods from one place to another. This type of cost includes operating, fixed, and maintenance costs. Anything that is related to the moving of the goods from one place to another is under the transportation cost. 

For instance, if the company needs to ship certain goods or services they would need to pay for handling fees, fuel, or any fuel surcharges. This could cost approximately $1,150. This figure might also vary depending on transportation mode such as sea, land, or rail transport system, insurance, and potential customs duties if shipping across borders.

3. Purchasing Cost

The cost of a good or service from an external source. It includes shipping and handling fees. Examples of purchasing costs include:

• Data entry – As the name states, it is entering data into the company’s managing system, to ensure data clarity and accuracy. Oftentimes, individuals handle large amounts of information in doing this work.

• File Management – The organization of files to ensure data is accessible for the company’s use. It also involves the assessment and evaluation of the said files, to ensure minimal risks.

• Duty execution – Duty execution encompasses various labor tasks that involve purchasing itself. Paying labor is a must, as it is both ethical and establishes the socio-economic relation between a company and an employee.

4. Contract Cost 

The cost involves vendor contract regulation, contract enforcement, and even as a part of the contract itself. It helps establish and secure contracts of the company with the suppliers. Basically, these are anything that the company may incur in the management or creation of a contract. 

The costs for a contract may vary, depending on the type of goods, services, and obligations you expect from your partners. For example, the wages for the workers involved in the project, project managers, and other staff involved, the costs of materials, the hiring of legal services, and the like. 

5. Inventory Cost

The Inventory cost involves the purchase and management of inventory within the procurement process. Basically, these are the expenses incurred during the storing, managing, and maintaining goods or materials that a business holds in stock. These costs are essential to consider because they directly impact profitability and cash flow. 

For example, when storing your inventory somewhere, you will need to pay for the rent, electricity, and other utility bills. Sometimes, there may even be a need for insurance. 

6. Taxes

Taxes are mandatory costs that a company pays to a governing entity. These are additional costs that are fixed and cannot be compromised. These are usually imposed by governments on its citizens, businesses, and other entities so that there are funds allocated for public spending. They pay for essential services and infrastructure like healthcare, education, defense, and public transportation. 

For example, there’s an inncome tax, which is charged on individuals’ or corporations’ earnings. There are also sales tax, which can be applied to the sale of goods and services, often a percentage added to the purchase price. Other taxes include property tax, corporate tax, excise tax, and payroll tax.

Reducing Procurement Cost

Effectively, procurement cost reduction can help your company improve its profitability. Also, it can enhance your competitive advantage in the market. 

Your procurement team can formulate better strategies, with reduced procurement costs alleviating spend weight.

This can eventually improve the company’s financial capacity to engage in more procurement activities. 

Moreover, it is always important to keep in mind that applying strategic spending will help your company remain afloat.

In the end, formulating the right spending strategy can ensure a smooth sailing procurement process. Procurement cost reduction can not only help your company in terms of profitability. 

It can also encourage value-building opportunities, without the worries of extensive costs.

Procurement Cost Vs. Procurement Fee

Basically, a procurement cost is what you need to pay for in executing your procurement. On the other hand, a procurement fee is a charge, or payment for the services you incur in the procurement process.

A procurement cost exemplifies the overall expense on the account of the procurement itself. A procurement fee specifies the amount you need to pay on account of services in the procurement process.

The tabular information below can help you better understand the difference between procurement cost and procurement fee in a much easier way. Costs and Fees are often confused with each other. Additionally, it can help you easily clarify what you’re dealing with, when it comes to spending in procurement.

Conclusion

In summary, a procurement cost is an expenditure that helps your company continue its necessary functions. Having a robust spending strategy can help you evaluate and assess the optimal pricing of your costs.

Additionally, controlling your costs can help minimize spending. It can also help improve potential and actual profitability. 

This article helps you understand procurement cost better, and how it serves as an important aspect of your company spending. By optimizing it, you can recognize, and create growth opportunities that can help the competitive value of the company.