By Charles Dominick, SPSM, SPSM2, SPSM3
Do Your Cost Savings Reports Have These Problems?
Cost savings is the most common performance metric executives use to evaluate their purchasing departments. So it's
critical to have strong cost savings reports.
Today, we'll examine three problems found in weak cost savings reports. Evaluate your approach and try to avoid having
these problems with your cost savings reports.
Problem #1: Using An Incorrect Baseline. Cost savings are calculated as the quantity to be purchased multiplied by
the difference between the price you will pay and some higher baseline price. Make sure that your company's executives
agree with the baseline you use. Picking a high but not credible baseline (e.g., the highest bid received) may maximize
your cost savings calculation but hurt your credibility with those executives.
Problem #2: Using Poor Quantity Estimates. Because the price you will pay is lower than the baseline price, your
cost savings total grows as you purchase more. You may report a certain cost savings value based on quantity estimates.
But what if you only end up buying half of that quantity? That's right your actual cost savings will be half of your
estimated cost savings. When you estimate your cost savings to executives, they expect the company to realize the cost
savings you estimate. If the cost savings realized is less than your estimate, you won't be their favorite employee!
Problem #3: Failing To Adjust Budgets. To executives, "cost savings" is synonymous with "profit improvement."
When you say that you will save $500,000 this year, they expect profits to be that much higher. So let's say that you
achieve cost savings of $500,000 for a department within the company. Where does that $500,000 go? Does it free up money
that they can spend on other things that they hadn't budgeted for? If so, then your "cost savings" is not really a "profit
improvement." The company is still incurring the same amount of expenses. To truly improve profit, an amount equal to
cost savings must be removed from the budget. Purchasing obviously can't do this alone, but working with senior management
in this respect can certainly help executives see the value of intelligent purchasing.
Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.
Earning your SPSM® Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM® Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!
Are you a procurement leader whose team isn't achieving the results you know are possible? Maybe it's not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.
You need a performance improvement plan that's easy to implement and quick to produce results. The NLPA can help.
Download our whitepaper "The Procurement Leader's Guide To A More Successful Team." You'll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.
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