How to track procurement savings effectively
Many Operations executives and other internal stakeholders are often asking questions whether the reported Operations total contributions (Savings) are legitimate and realistic with a direct impact on the company´s financial performance. Without a standard and methodical approach to capturing, measuring and reporting the Savings the company runs several risks:
• Miscommunicating the value delivered by Procurement and potentially guiding the Business into making wrong strategic relocation, footprint initiatives or other strategical decisions
• Impairing the trust relationship between Procurement and Finance department, resulting in spending a disproportionate amount of time and resources proving and justifying cost saving numbers
Savings reporting should be easy – why are there so many challenges?
A saving is a financial measure of a reduction or lessening of costs on products and/or services purchased. Typically the cost baseline is a previous year’s price, but may also be a budget, estimate or planned expense multiplied by a quantity purchased in the same period. To reach a high level of transparency the savings are broken into two basic types: cost savings and cost avoidances.
Cost savings typically have a direct impact on Profit & Loss (P&L) statement and EBITA and are calculated as a variance between a previous year’s price and a newly negotiated price multiplied by the quantity purchased.
Cost avoidances maintain current spend levels by avoiding price increases and inflation or market effects and are calculated as a variance between the budget price and a newly negotiated price multiplied by the quantity purchased. Though cost avoidance initiatives normally do not have an immediate impact on the P&L compared to a prior period, a healthy Procurement organization will track the impact of such activities to fully capture the efforts and value provided by performing such activities.
Strong Procurement savings tracking, planning and reporting in conjunction with the robust Strategic sourcing review processes are essential for any Business that wants to take Procurement seriously. Unfortunately this is often not the case for lots of Business where in reality Strategic sourcing reviews are unstructured, savings projects are delivered with long delays with huge negative impact on P&L, savings get reported incorrectly due to use of several Excel spreadsheets and errors and so on…
This can be fixed with the implementation of robust definitions, savings planning and reporting processes, strategic sourcing review processes and use of best in class digital procurement technologies.
Contact us and let us help you get your Savings reporting, tracking and planning to the Best in class levels with our expertise in this area and use of our PST Web app.
