In procurement, we celebrate the achievement of cost savings. Like when we conduct strategic sourcing or engage in a negotiation and end up paying a lower price for a product or service than we did last year.
Of course, that’s great. And, instinctively, we know that our cost savings helps our organization.
But, it’s not enough to know that cost savings helps our organization.
We need to take things to the next level and understand how cost savings helps our organization. Where do these millions of dollars in cost savings go?
- Drop to EBITDA and then – after deductions – to net income, where they technically become the property of the organization’s ownership/stockholders?
- Get reinvested in activities that produce a clear return on investment, such as new product development?
- Get deployed for things that have value, though not necessarily a clear ROI, like increasing the salary pool and enabling employees to earn merit-based raises?
- Enable the company to complete deferred/overdue projects like upgrading computers, furniture, etc. that it only does during “good times?”
- Simply enable budget holders to acquire more goods and services for a fixed budget?
- Not really have a clear use?
Obviously, if there is no clear use for cost savings, they – and possibly the entire work of the procurement department – may not be perceived as very valuable to the organization. Therefore, it is important for every procurement professional to understand how cost savings benefits the organization in the eyes of its senior executives. And, if those senior executives don’t really have a plan for how cost savings should be used, it is important for procurement professionals to lead the charge in helping senior executives develop such a plan.
That is just one more way that procurement can become more strategic.