Reasons Realized Savings Falls Short, Part I

Is Your Realized Savings Disappointing Management?

PurchTips Editions #349              Click here for the printer-friendly version

Picture of Charles Dominick, SPSM, SPSM2, SPSM3, author of this procurement article on realized savingsBy Charles Dominick, SPSM, SPSM2, SPSM3

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Procurement departments typically report their cost savings when a contract has been signed. At that point, those cost savings are considered “Negotiated Savings” per our Procurement Funnel model. In other words, the organization hasn’t truly saved any money yet because it hasn’t actually bought anything at a lower price yet.

“Realized Savings” are calculated at the end of a fiscal year, after goods or services have been bought. Often “Realized Savings” are less than “Negotiated Savings.” And people get mad at the procurement department if there’s a difference. But should they be mad at procurement? It depends. Let’s explore some various reasons that “Realized Savings” ends up being less than “Negotiated Savings” and how much blame the procurement department should (or shouldn’t) get.

Reason #1: Prices varied from assumptions. If the organization ends up paying higher prices than those specified in a contract, it is probably the procurement department’s fault. If a supplier bills more than agreed, the procurement department has failed to manage the supplier and the contract. If a supplier charges over-and-above fees or substitutes products or services not discussed during the negotiation, the procurement department should have had known more about its organization’s requirements and the market.

Reason #2: End user compliance was less than 100%. If end users buy from non-contracted competitors at higher prices instead of contracted suppliers, it may or may not be the procurement department’s fault. If the procurement department didn’t adequately introduce the new supplier or failed to take specialized end user needs into its supplier selection, then poor compliance is the procurement department’s fault. But if this “rogue buying” is driven by mavericks who scoff at corporate mandates, then those mavericks should be held accountable, not the procurement department.

We’ll cover Reason #3 in the next edition of PurchTips.

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