The Wrong Cost Savings Goal
PurchTips edition #169
By Charles Dominick, SPSM, SPSM2, SPSM3
Is Your Cost Savings Goal Wrong Or Right?
It's the New Year. New years bring new goals, right?
Well, there is a purchasing goal that is both common and wrong. That wrong goal looks similar to this: "Achieve cost savings of $500,000 this year."
You may ask, "Why is this wrong? This is almost identical to my goal!"
The reason is apparent when you compare it to an example of a goal that is right: "Achieve a cost savings of $500,000 this year while maintaining or improving supplier performance." Too often, unskilled purchasers try to achieve cost savings goals by replacing old suppliers with cheaper suppliers who fail to meet performance standards. That's unacceptable and may actually reduce profits instead of increasing them.
As a talented, modern purchaser, you must get the best price while evaluating and qualifying suppliers that will perform better than the incumbent. This means improving on-time delivery, material defect rates, supplier service levels and internal customer satisfaction on top of getting a lower price.
Also consider that achieving cost savings does not always mean finding new suppliers. If ever there was a time ripe for negotiating with incumbent suppliers, it is in today's weak global economy. Retaining existing suppliers - provided that they are financially healthy - is one way of mitigating the risk of having supplier performance degrade.
So be sure to mention supplier performance in your cost savings goals! And if you're not in a position to rewrite your "wrong" cost savings goal, share metrics showing maintained or improved supplier performance when reporting your actual cost savings throughout the year. It will show management and internal customers that you know the importance and impact of modern purchasing.
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Need Better Performance From Your Procurement Team?
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.
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