How To Calculate Cost Avoidance In Procurement?
Introduction
Are you tired of overspending on procurement? The key to saving money and optimizing your procurement process lies in cost avoidance. By understanding how to calculate cost avoidance, you can identify potential savings opportunities and make more informed purchasing decisions. In this blog post, we’ll show you everything you need to know about calculating cost avoidance in procurement – from the basics to advanced tactics that will help streamline your process and improve your bottom line. So grab a pen and paper, buckle up, and let’s dive into the world of procurement cost avoidance!
The Basics of Cost Avoidance
There are a few basic concepts that need to be understood in order to calculate cost avoidance in procurement. The first is the notion of opportunity cost, which is the value of an option that has been forfeited. The second is the concept of marginal costs and total costs. Third, there is the calculation of average costs, which takes into account both total and marginal costs. Finally, there is the calculation of net present value (NPV), which measures how much money would be saved by making a particular decision today rather than waiting for future events to occur.
Understanding opportunity cost can be difficult for some people because it requires a bit of calculus. However, it’s an important concept in procurement because it determines how much money one could have earned by taking another option instead of choosing the one they chose. For example, suppose you are considering two jobs offers: job A pays $60,000 per year and job B pays $70,000 per year. Suppose you choose job A but later find out that you could have earned $10,000 more by choosing job B. In this case, your opportunity cost (the additional amount you could have earned) is $60,000 – $10,000 = $50,000.
The next concept to understand is marginal costs and total costs. Marginal costs refer to the additional expenses incurred when producing a unit of a good or service. For example, if you produce widgets at a factory using raw materials costing $1 per widget
How to Calculate Cost Avoidance in Procurement
When you are in the procurement process, it is important to be mindful of how to calculate cost avoidance. Here are four methods for calculating cost avoidance:
1. Economic Evaluation Methodology
2. Life-Cycle Methodology
3. Cost Breakdown Methodology
4. Benefit/Cost Analysis Methodology
Economic Evaluation Methodology
The economic evaluation methodology is a common way to calculate cost avoidance in procurement. This method involves conducting a study to compare different options and selecting the option that results in the lowest costs overall. The benefits of this methodology include that it can help you identify areas where you can save money on your procurement project, and it can help you prioritize your options based on their potential cost savings.
Life-Cycle Methodology
Another way to calculate cost avoidance in procurement is through the use of life-cycle analysis (LCA). LCA uses data from a variety of sources (such as market research, product specifications, historical data, etc.) to create a detailed picture of how an item will be used over its lifespan (the life cycle of an object or service). By understanding how an item will be used, you can better predict which parts will need replacement or adjustment over time, which could lead to decreases in the total cost of ownership (TCO) for the item. LCA can also help you identify potential wastefulness within your procurement process, and can ultimately lead to more efficient spending on your behalf.
Conclusion
The purpose of this article is to provide procurement managers with the necessary tools needed to calculate the cost avoidance potential in their procurements. The article first provides a definition of cost avoidance, followed by a discussion on how it can be calculated through several methods. Various sources of data are then examined to illustrate how they can be used to calculate cost avoidance potential. The article concludes with a review of some common pitfalls that Procurement Managers should avoid when calculating cost avoidance potential.