Everything You Need To Know About Procurement Savings

Everyone wants to get more while paying less. Procurement and Finance teams are no different – they’re passionate about cutting costs and creating value for the company. But how do they know what savings to look for, and how do they calculate it?

In this article, we’ll look at what Procurement teams need to understand about savings so that they can identify every possible opportunity for their organization. We’ll cover the different types of savings, and provide concrete advice on how to identify those opportunities using the best practices of both Procurement and Finance departments.

We’ll also show you how to measure the ROI of your procurement efforts, and explain why saving money isn’t always synonymous with success.

What are Procurement Savings?

Procurement savings refer to the cost reductions that are achieved by a company when it purchases goods and services through a strategic sourcing process. In simple words, procurement savings are the difference between the cost of goods and services that a company pays in the current time period and the amount that it would have paid had it continued to buy at the same price from the same supplier.

There are different ways in which procurement and finance professionals see procurement savings. While procurement professionals focus on savings from a cost-avoidance perspective, finance professionals tend to see savings from a cost reduction perspective. However, it is essential to align on savings goals as it ensures that all departments can work towards the same objective.

To calculate procurement savings, it is necessary to have a baseline of the current spend, understand the market price of goods and services, and identify areas where savings can be achieved. It is crucial to ensure that the savings calculation is accurate, meaningful, and relevant to the business. There are various types of cost savings, such as hard savings and soft savings, and not all savings are equal.

To make the most of procurement savings, it is critical to have a procurement function that is aligned with procurement savings goals and has access to the necessary data and tools. By adopting best practices such as spend analysis, supplier management, and e-procurement, companies can save money and increase efficiency.

💡 key Takeaway: Procurement savings are the cost reductions achieved by a company when purchasing goods and services through strategic sourcing. It is essential to align savings goals and accurately calculate savings to make the most of the procurement process.

What is Procurement?

Procurement is the process of acquiring goods and services from external vendors. Companies need procurement to secure the raw materials, components, and supplies they need to produce their products or deliver their services. Procurement also involves finding reliable vendors, negotiating contracts, managing inventory, and ensuring timely delivery.

How does Procurement generate savings?

Procurement professionals are responsible for finding the best value for their organization. Procurement savings come from negotiating better prices, leveraging volume discounts, reducing waste, optimizing inventory, and improving supplier performance. Savings can also come from reducing transactional costs, such as paperwork, administrative tasks, and invoice processing.

How does Finance see savings?

Finance evaluates savings from a holistic perspective. They consider the total cost of ownership, which includes direct costs (e.g., purchase price) and indirect costs (e.g., storage, transportation, disposal). Finance also looks at the impact of procurement on cash flow, working capital, and return on investment.

How to align Procurement and Finance on savings?

Aligning Procurement and Finance on savings involves defining savings metrics, setting performance targets, and monitoring progress. Procurement and Finance need to have a shared understanding of what counts as savings and how to measure them consistently. By having a common language and goals, Procurement and Finance can work together to optimize the value chain.

💡 key Takeaway: Procurement is the process of acquiring goods and services from external vendors. Procurement generates savings through negotiating better prices, reducing waste, optimizing inventory, and improving supplier performance. Finance evaluates savings from a holistic perspective and considers the total cost of ownership. Aligning Procurement and Finance on savings involves defining savings metrics, setting performance targets, and monitoring progress.

What is the role of Procurement in the organization?

Procurement is a critical function within an organization as it is responsible for purchasing goods and services in a cost-efficient manner. The primary goal of procurement is to acquire the required goods and services at the lowest possible cost. Procurement savings, therefore, play a vital role in any organization’s financial success. However, understanding procurement savings and how to calculate them can be a complex process.

To begin with, it is important to understand that procurement savings can be seen from two perspectives: Procurement and Finance. Procurement often identifies savings based on the difference between the current price and the price negotiated during the procurement process. Finance, on the other hand, looks at savings based on the actual contracted spend.

Aligning on savings is crucial in any organization as misaligned savings estimates can lead to various financial and operational issues. To align savings estimates, Procurement and Finance must first determine the savings methodology, savings baseline, and savings timeline. Determining these factors can be complex, and it’s crucial to have a clear understanding of each to avoid any misaligned savings estimates.

Calculating procurement savings can also be challenging. Accurately evaluating the savings requires data mining, understanding the contracted spend vs. market price, and how the savings were generated in the first place.

💡 key Takeaway: Procurement savings are critical for organizational success, and aligning on the savings methodology, savings baseline, and savings timeline between Procurement and Finance is necessary. Calculating procurement savings requires a proper understanding of the contracted spend vs. market price, how the savings were generated in the first place, and data mining expertise.

What are the different types of Procurement savings?

When it comes to procurement, savings are one of the most important goals for both procurement and finance teams. However, the way these teams view savings can often differ. Procurement teams typically look at savings in terms of cost avoidance, cost reduction, and cost containment. On the other hand, finance teams generally view savings as actual cash savings. So how can these two teams align on savings? One way to align is to create a common definition of savings and to agree on how it will be calculated. It’s also important to establish a system for tracking savings and reporting on progress.

There are several different ways to categorize procurement savings, but here are some of the most common types:

– Price savings: This is one of the most straightforward types of savings, and it is achieved by negotiating lower prices with suppliers.

– Quantity savings: This type of savings is achieved by buying larger quantities of a product or service at a lower unit cost.

– Process savings: This type of savings is achieved by streamlining procurement processes, eliminating waste, and reducing inefficiencies.

– Specification savings: This type of savings is achieved by simplifying product or service specifications, thus reducing costs.

It’s important to note that different procurement projects may prioritize different types of savings. For example, a project aimed at reducing supply chain waste may focus on process savings, while a project aimed at reducing the cost of a specific product may focus on price savings.

💡 key Takeaway: Procurement savings can take different forms, including cost avoidance, cost reduction, and cost containment. It’s important to align procurement and finance teams on the definition of savings and establish a system for tracking and reporting on progress. Different types of procurement savings include price savings, quantity savings, process savings, and specification savings. Projects may prioritize different types of savings depending on their goals.

How to Align Procurement and Finance on Savings

When it comes to procurement savings, it’s important that both procurement and finance departments are aligned on what savings mean and how they can be calculated. Here are some ways to ensure a common understanding:

1. Define savings: The first step to aligning on savings is to define what savings mean for your organization. This will help avoid confusion and ensure everyone is on the same page. Savings can include cost reductions, process improvements, and supplier negotiations.

2. Agree on the calculation: Once you’ve defined savings, the next step is to agree on how to calculate them. There are different ways to calculate savings, so it’s important to select the one that is most appropriate for your organization. One common method is to compare the cost of goods or services before and after procurement optimizations.

3. Ensure Transparency: Transparency is key when it comes to procurement savings. Both procurement and finance teams should be able to access and review savings data easily. This will help ensure that everyone is accountable and on the same page.

4. Leverage technology: There are many tools available to help track and report procurement savings. Leveraging technology can help automate the calculation and reporting of savings, which can save time and increase accuracy.

By aligning on savings, procurement and finance departments can work together effectively to ensure savings are realized and properly reported. This can lead to stronger partnerships and more successful procurement initiatives.

💡 key Takeaway: Procurement savings can be complex, but ensuring alignment between procurement and finance departments can help simplify the process and make savings more impactful.

What are the benefits of aligning Procurement and Finance?

Aligning procurement and finance can lead to a number of tangible benefits for your organization. By working together effectively, they can deliver significant process improvements, cost savings, and greater visibility and control over financial performance. Let’s take a closer look at some of the key benefits of aligning procurement and finance in your organization.

Improved spend visibility:

Collaboration between procurement and finance teams can ensure greater visibility over what’s being spent, where it’s being spent, and why it’s being spent. This can help identify opportunities to reduce costs or eliminate any unnecessary expenses, thus leading to better financial results.

Increased cost savings:

Another key benefit of procurement and finance alignment is the ability to drive significant cost savings. By working together, they can identify areas where procurement can leverage its buying power or engage in strategic sourcing initiatives to consolidate spend and negotiate better contracts.

Streamlined processes:

Alignment between procurement and finance can also help streamline processes, such as purchase order processing, invoice reconciliation, and payment processing. This can lead to improved efficiency and productivity, freeing up time for staff to focus on higher value-added activities.

Better decision-making:

Lastly, procurement and finance alignment can lead to better decision-making across the organization. By sharing insights and data, they can work together to identify opportunities and make fact-based decisions that support the overall goals of the organization.

💡 key Takeaway: Aligning procurement and finance can deliver significant process improvements, cost savings, and greater visibility and control over financial performance.

How to create a shared language and objectives

When it comes to procurement savings, it’s important to establish a shared language and objectives between Procurement and Finance. This helps ensure that everyone is on the same page when it comes to identifying, tracking, and measuring savings. To create this shared language and objectives, here are some key steps to follow:

1. Define savings: First, it’s crucial to define what savings mean in the context of procurement. This can include cost reductions, cost avoidance, and other financial benefits.

2. Align on definitions: Once you have defined savings, it’s important to ensure that Procurement and Finance are both using the same definitions. This can help avoid confusion and maintain consistency.

3. Set goals: Next, it’s essential to set goals for savings. This can be done by looking at historical data or industry benchmarks, and can help ensure that everyone is working towards the same objectives.

4. Track savings: To measure savings, it’s important to have a system for tracking and reporting them. This can include using a savings dashboard or other tools that allow for easy monitoring of procurement savings.

5. Communicate progress: Finally, it’s important to communicate progress and results to both Procurement and Finance. This can help build trust and ensure continued alignment on savings objectives.

By following these steps, Procurement and Finance can create a shared language and objectives around procurement savings, which can lead to more accurate tracking, reporting, and ultimately, more successful procurement strategies.

💡 key Takeaway: Creating a shared language and objectives for procurement savings between Procurement and Finance is critical for accurately tracking, reporting, and achieving procurement savings goals.

What are the best practices for aligning Procurement and Finance?

When it comes to aligning Procurement and Finance, there are several best practices to keep in mind to ensure that both teams are on the same page. By following these practices, you can ensure that your organization is generating measurable and sustainable procurement savings.

1. Have regular communication between teams: Regular communication between Procurement and Finance is essential to align on savings. Both teams should have a clear understanding of each other’s goals and objectives to work together efficiently.

2. Develop a savings methodology: It’s important to define how savings will be measured, tracked, and reported. By developing a consistent methodology, the two teams can compare metrics over time, enabling them to track and report on savings.

3. Implement a joint governance model: A joint governance model allows Procurement and Finance to work together to manage savings outcomes, identify improvement opportunities, and manage procurement risks.

4. Understand the procurement process: Finance needs to know that procurement is a complex process. Procurement is responsible for negotiating and selecting suppliers that meet the organization’s needs for goods and services. By understanding the procurement process, Finance can work with procurement to optimize the procurement spend.

By following these best practices, Procurement and Finance can work together to drive significant savings and improve organizational efficiency.

💡 key Takeaway: To drive procurement savings, regular communication, a consistent savings methodology, a joint governance model, and an understanding of the procurement process are all critical success factors.

Measuring and Calculating Procurement Savings

Procurement savings are a key metric for measuring the success of procurement efforts. Understanding how to measure and calculate these savings is crucial for any procurement professional. There are different ways to approach the calculation of procurement savings, depending on the specific goals and objectives of each organization.

Types of Procurement Savings:

– Price savings: Cost reductions achieved by negotiating lower prices with suppliers.

– Cost avoidance: Savings achieved by preventing costs that would have been incurred without a particular procurement initiative.

– Demand management: Savings achieved by optimizing demand for goods and services through collaboration between procurement and other departments.

– Process improvements: Savings achieved by streamlining procurement processes, reducing cycle times, and eliminating waste.

Aligning Procurement and Finance on Savings:

Procurement professionals and finance teams often have different perspectives on how to measure procurement savings. Procurement may focus on cost reductions achieved through supplier negotiations, while finance may look at the broader impact of procurement efforts on the company’s financial performance.

To align procurement and finance perspectives on savings, it is essential to communicate clearly and collaborate closely to ensure that both sides have a complete understanding of the procurement process and its impact on overall financial performance.

Calculating Procurement Savings:

There are different methods for calculating procurement savings, including the following:

– Price variance analysis: A comparison of actual prices paid for products or services against the market price or a benchmark. The difference between the two is the price variance, which can be used to calculate the savings achieved through negotiations.

– Total cost of ownership (TCO) analysis: A comprehensive approach to calculating the total cost of a product or service, including all direct and indirect costs, such as maintenance, training, and disposal. TCO analysis can help identify potential cost savings opportunities and inform procurement decisions.

– Baseline analysis: A comparison of current costs against historical costs for the same products or services. This analysis can help identify areas for cost reduction and track progress over time.

💡 key Takeaway: Measuring and calculating procurement savings is essential for evaluating procurement success. Different types of savings can be achieved through procurement efforts, and aligning procurement and finance perspectives on savings is crucial. There are different methods for calculating procurement savings, and it’s important to use the appropriate method depending on the organization’s goals and objectives.

How to calculate the Total Cost of Ownership (TCO)

Calculating the total cost of ownership (TCO) is an essential part of procurement savings. TCO refers to the total cost of acquiring and maintaining a product or service over its lifetime. This includes the cost of purchase, maintenance, repairs, and any other associated expenses. To calculate TCO, you need to consider all the costs associated with the product or service, including any hidden costs, such as transportation or storage.

Why is TCO Important?

TCO is important because it provides a total cost view of a product, service or supplier beyond just the purchase price. This can help identify areas where savings can be realized. By using TCO analysis, you can ensure that the purchasing decision is not based solely on the upfront cost of the product or service, which can be deceiving.

Factors to Consider When Calculating TCO

To accurately calculate TCO, it’s important to consider several factors, such as:

– Purchase Price: The cost of acquiring the product or service.

– Maintenance and Support: The cost of keeping the product or service operating correctly.

– Operational Costs: Costs associated with using the product or service, such as energy consumption.

– Disposal Costs: The cost of disposing of the product or service at the end of its useful life.

Benefits of Using TCO

Using TCO can provide numerous benefits. These include:

– More Accurate Budgeting: By considering all the costs associated with a product or service, TCO provides a more accurate picture of the total expenditure.

– Better Decision-Making: TCO analysis offers a comprehensive picture of a product or service, helping organizations make better-informed decisions.

– Identifying Improvement Areas: By examining TCO, organizations can identify areas to improve operational efficiency and uncover new cost-saving opportunities.

💡 key Takeaway: TCO is an important aspect of procurement savings, which helps identify the total cost of acquiring and maintaining a product or service over its lifetime. By considering all costs, including hidden expenses, TCO provides a more accurate picture of the total expenditure, aiding improved decision-making, accurate budgeting, and identifying cost-saving opportunities.

What are the different methodologies for calculating savings?

When it comes to calculating procurement savings, there are several methodologies available. Each methodology has its own benefits and drawbacks, and choosing the right one should depend on the specific needs and goals of the organization. Here are some of the most commonly used methodologies:

1. Hard Savings Methodology – Hard savings methodology is the most straightforward way to calculate procurement savings. It involves taking the difference between the amount actually spent and the amount budgeted for the same product or service.

2. Soft Savings Methodology – Soft savings are cost savings that are realized through improvements in process efficiency or increased productivity. Soft savings can be harder to quantify, but they are still crucial to the overall success of a procurement program.

3. Commodity-Based Methodology – The commodity-based methodology is a way to calculate savings based on the specific characteristics of the commodity being purchased.

4. Cost Avoidance Methodology – Cost avoidance involves identifying and avoiding potential cost increases before they occur. This methodology is typically used to measure savings from risk management activities.

When it comes to choosing a savings methodology, organizations must consider their specific needs and goals. Cost savings methodologies used should be consistent and trackable over time. It is essential to align with Finance to ensure standardized approaches are used and goals are aligned. Remember, savings calculation is only the first step. You also need to report on how the savings were achieved, what the impact was, and any barriers or opportunities that were observed.

💡 key Takeaway: Calculating procurement savings is a critical component of a successful procurement strategy. There are different methodologies available, including hard savings, soft savings, commodity-based, and cost avoidance. Each methodology has its benefits and limitations, and organizations should choose the one that best aligns with their specific goals and process.

What are the best practices for measuring and calculating savings?

When it comes to measuring and calculating procurement savings, there are a number of best practices that can help ensure accuracy and alignment between Procurement and Finance. Here are some key considerations to keep in mind:

1. Define your savings methodology: Before you start calculating savings, it’s important to have a clear methodology in place. This should outline how you define savings, what types of costs are included or excluded, and how you calculate the baseline for comparison. By agreeing on this methodology upfront, you can avoid disagreements down the line and ensure consistency in your calculations.

2. Align with Finance: Procurement and Finance may have different perspectives on what constitutes savings and how they should be measured. To ensure alignment, it’s important to engage Finance early in the process and work together to define your methodology. This can help ensure that your savings calculations are consistent with the organization’s financial reporting practices and can be properly tracked and reported.

3. Calculate both hard and soft savings: Procurement savings can come in a variety of forms, including both hard and soft savings. Hard savings are typically more straightforward to calculate, as they represent a direct reduction in costs (e.g. negotiating a lower price for a product). Soft savings, on the other hand, are more intangible and may include things like improved quality, reduced risk, or increased efficiency. To capture these savings, it’s important to develop clear metrics that can help quantify their impact.

4. Monitor your results: Once you’ve defined your methodology and started calculating savings, it’s important to track your results over time. This can help you identify areas where additional savings opportunities may exist, as well as ensure that your methodology is continuing to deliver accurate and meaningful results.

Remember, while measuring and calculating procurement savings can be a complex process, taking a structured and consistent approach can help ensure that you achieve accurate and meaningful results that are aligned with your organization’s financial reporting practices.

💡 key Takeaway: Measuring and calculating procurement savings can be a complex process, but adopting a structured and consistent approach can help ensure that you achieve accurate and meaningful results that are aligned with your organization’s financial reporting practices.

Leveraging Procurement Savings to Maximize Value

When it comes to procurement, achieving cost savings is a top priority. However, savings can be viewed differently by different departments, namely Procurement and Finance. It is important to align on how savings are calculated and measured to ensure both departments are in agreement.

Aligning on Procurement Savings:

To align on procurement savings, Procurement and Finance must agree on the definition of savings, how it is tracked, and how it contributes to overall financial performance. A best practice is to establish a savings tracking tool that captures all savings initiatives and presents the data with clear categories and definitions. This way, both departments can understand what savings have been achieved, and how they were achieved.

Calculating Procurement Savings:

Procurement savings can be achieved through various activities such as reducing unit costs or negotiating better contract terms. To calculate these savings, it’s important to measure current procurement spend and compare it to future spend after cost savings initiatives have been implemented. Once these figures are established, the savings can be calculated and reported to both Procurement and Finance departments accurately.

💡 key Takeaway: Aligning Procurement and Finance on savings definitions and tracking is essential to maximizing value and financial performance. By establishing clear categories and definitions in a savings tracking tool, both departments can work together to achieve procurement savings and understand how they contribute to the bottom line.

How to leverage savings to create long-term value

Procurement savings is an essential aspect of a company’s cost-saving measures that can help create long-term value. Procurement and Finance departments view savings differently, leading to disagreements over what constitutes a saving. To align on savings, both departments must understand each other’s perspectives and come to a consensus. Procurement savings can be calculated in many ways, depending on the business’s approach, objective, and strategy. Some common metrics used to calculate savings include price reduction, cost avoidance, and total cost of ownership. Engaging in strategic sourcing and leveraging supplier relationships can result in long-term savings, e.g., reducing lead times, improving quality, and streamlining workflows. By tracking the realized savings and sharing them with stakeholders, the company can measure its performance, identify areas of improvement, and optimize its procurement strategy accordingly.

Understanding the difference between Procurement and Finance’s view on savings

Procurement department sees savings as the difference between the current and the negotiated price. Their focus is on lowering the cost of goods and services, often by negotiating with suppliers for better terms, volume discounts, and improved payment terms. Finance department, on the other hand, sees savings as the difference between the actual and the budgeted expenditures. They focus on achieving the target savings as part of the company’s cost-saving measures.

To align on savings, both departments should:

– Agree on what constitutes savings and how to measure it

– Develop a common language and understanding of procurement process

– Regularly communicate the procurement savings achieved and share the data openly with stakeholders

Calculating Procurement savings

Procurement savings can be calculated using metrics such as:

– Price reduction: the difference between the current and the negotiated price

– Cost avoidance: the cost saved by avoiding future expenses, e.g., reducing inventory levels, avoiding expediting costs

– Total cost of ownership: the cost of owning and operating a product or service, including maintenance, repair, and disposal costs.

Leveraging savings to create long-term value

Fostering strong supplier relationships and strategic sourcing are essential to achieving long-term savings. These strategies involve engaging with suppliers to provide better quality products or services, shorter lead times, and improved pricing. Collaborating with suppliers can also reduce operating costs,

What are the best practices for utilizing savings?

To effectively utilize procurement savings, one must follow certain best practices. The first step in this process is to clearly define what counts as saving for your organization. As procurement and finance may have different views on savings, it is important to align on what qualifies as savings before creating a plan for utilization. This can be achieved by creating a common definition that both teams agree on. Second, it is important to

What are the benefits of leveraging Procurement savings?

Procurement savings have become a top priority for companies looking to maximize their bottom line. By leveraging the benefits of procurement savings, businesses can significantly reduce their expenditures without sacrificing quality. Here are some of the key benefits of leveraging procurement savings:

1. Cost reduction: Perhaps the most obvious benefit of procurement savings is the significant cost reduction. By finding ways to negotiate better deals with suppliers, businesses can reduce their expenses without compromising on quality.

2. Increased efficiency: Procurement savings can also help companies streamline their operations and improve their efficiency. By implementing standardized processes, businesses can reduce waste and eliminate redundancies, leading to increased productivity and profitability.

3. Competitive advantage: By leveraging procurement savings, businesses can gain a competitive advantage over their rivals. By reducing costs, companies can offer their products and services at more competitive prices, making them more attractive to consumers.

4. Improved supplier relationships: Effective procurement savings strategies can also improve the relationship between businesses and their suppliers. By negotiating better deals and building stronger relationships, companies can ensure a reliable supply of goods and services and foster innovation and collaboration within their supply chain.

💡 key Takeaway: Leveraging procurement savings can bring a range of benefits to any business, from reduced costs and increased efficiency to improved supplier relationships and a competitive advantage.

Conclusion

Procurement and Finance are two departments in any business that are constantly looking for ways to save money. Procurement is responsible for acquiring goods and services for the business, and Finance is responsible for allocating those funds in the most efficient way possible. Savings can be achieved in a variety of ways, and it’s important to align procurement and finance on these savings to ensure that the company is getting the best value for their money. There are a few steps that you can take to calculate your procurement savings: 1. Identify where your company is spending the most money. 2. Review your current procurement processes and see where improvements can be made. 3. Calculate your procurement budget and see where you can cut costs. 4. Evaluate your supplier base and see where you can improve relationships. 5. Analyze your purchasing trends and see where you can reduce costs.