When to claim procurement savings.
Filed Under Blog
Imagine the scenario your faced with a really complicated contract situation – annual spend is c$100,000 you’ve negotiated a 10% reduction on last years piece price cost and your pretty pleased with yourself, you think you’ve generated a pretty great saving.
But is it? You speak to the finance manager and he says “at this point you’ve saved nothing!”
Buyers and commodity managers work savings projects all the time but how do you calculate savings and when should they be reported – the key issue here is “you have to think like a finance manager.”
Consider the example above do you have a saving when.
• You’ve signed the contract
• When PO’s are sent out for the part
• At the end of the next financial year when you can compare spend on the commodity
Most businesses work by comparing financial spend from one year to the next and most organizations will not view anything as a saving, not simply following a contract negotiation, until it is recorded in their financial ledger
Consider, also how you calculate your cost saving. Your savings that have been negotiated will typically only be quotable in the first year (you won’t be able to claim the same saving for many years running.) this is because the revised costs will be baked in to the next years budget and if you achieve no further reductions the following years costs will be identical.
Also consider the scenario where consumption goes up and any saving is dwarfed by increased expenditure. Such situations can be commonplace when demand is variable or there are poor controls over purchasing. Is your saving still a saving?
Understanding when to “bank” savings can cause much concern for procurement staff. Calculating cost savings concerns many purchasing professionals with many being unfamiliar with the accounting rules. Within your own organization take the time to understand how the financial systems work – learn what your finance team consider a saving and develop a process whereby savings are officially ratified (many companies track officially recognized savings through a savings certificate which is reviewed by cross functional stakeholders.
Whatever the process, savings initiatives will always relevant in business. The key issue is having suitable processes behind it that are clear in what the business considers a saving to be and how it is realized.