I hope that you have enjoyed the article “An Analysis of Cost Savings Claims.”

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The common thread in all of the the disputed cost savings claims in the article was a baseline that failed to follow best practices.  One of the most common miscalculations of a baseline is the use of “last price paid” instead of “previous fiscal year’s average price.”

If you bought something all year at one price but paid a higher price on the last day of the year, that last price does not adequately represent your spend.  As I always teach, finance executives and CEO’s use financial statements – issued by fiscal year – to determine changes in financial performance.  Therefore, your baseline should represent how the purchased product or service impacted the previous fiscal year’s financial statements.  Using “previous fiscal year’s average price” does that.  Using “last price paid” may not.

I hope to cover more about cost savings baselines in future editions of PurchTips.

Charles Dominick, SPSM, SPSM2, SPSM3

Charles Dominick, SPSM, SPSM2, SPSM3 is an internationally-recognized business expert, legendary procurement thought leader, award-winning entrepreneur, and provocative blogger. Charles founded the Next Level Purchasing Association in 2000, oversaw its incredible growth, and successfully led the organization to its acquisition by the Certitrek Group in 2016. He continues to blog and provide advisory services for the NLPA on a part-time basis as he incubates his upcoming business innovations. Charles is also the co-author of the wildly popular, groundbreaking book, "The Procurement Game Plan: Winning Strategies & Techniques For Supply Management Professionals."

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