Savings Estimates: Your Reputation At Risk
PurchTips edition #188
Can Bad Savings Estimates Hurt Your Career?
Whether setting goals for a year or getting management sign-off on a new contract, you can expect to regularly be asked for cost savings estimates that reflect your procurement work. While you may be inclined to give aggressive savings estimates to look good, if those estimates fail to match the actual savings at the end of the year or contract, your reputation will be damaged.
As you would with any risk, you need a plan to manage this risk. Risk planning means identifying all risks that may hamper your ability to succeed; determining the probability of occurrence for each risk; and developing a plan to avoid, mitigate, transfer, or accept each risk.
I'll give you a few examples of common risks to savings estimates when switching to a new supplier. But it is up to you to figure out the probability of each risk and how you will plan for them in your own situations.
Risk #1: The New Supplier Won't Perform As Expected. When replacing a supplier who has performed well for years, stakeholders won't be very patient if the new supplier can't match the incumbent's performance right away. In such case, you'll be pressured to revert to the higher-priced incumbent.
Risk #2: The New Supplier Will Raise Its Price After Securing Your Business. Savings estimates are usually based on the new supplier's proposed pricing. Yes, you can execute a contract to legally obligate the supplier to honor that pricing. But what if the supplier refuses to?
Risk #3: Your Organization Will Buy A Smaller Quantity Than Expected. Savings is often calculated by multiplying the year-over-year price difference by the quantity to be purchased. So, if the quantity is less than expected, your savings will be too. How confident are you that you know the demand drivers and that the quantity bought won't be notably lower than estimated?
Risk #4: Members Of Your Organization Will Buy From Non-Contracted Sources. Most savings estimates assume 100% compliance from their organization's end users or decentralized buyers. But maverick buying can occur. How will you ensure that no one in your organization rejects the new supplier?
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Copyright 2009. This article is the property of Next Level Purchasing and may not be copied or republished in any form without the express written consent of Next Level Purchasing.
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By Charles Dominick, SPSM, SPSM2, SPSM3
Other Editions of PurchTips:
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