In the same way that companies track the revenue generated by their sales and marketing departments, they can also track the cost savings delivered by the finance and procurement departments. Although cost savings may appear to be much smaller than sales revenue over the same period, they can have an equally powerful impact on companys profitability.
The best way to illustrate this is with an example:
Increasing sales revenues by 1 million for a company with a sales margin of 10% will have the same effect on the company's bottom line profit as reducing costs by 100,0000.
Think about how much additional sales revenue would need to be generated to equal a 1 million cost saving delivered through having better visibility and control of third-party supplier spend.
Creating a baseline level of current spend with a supplier is necessary before calculating procurement savings. The reduction in cost and the avoidance of costs are then subtracted from the baseline.
The reduction in cost is the amount saved by purchasing a good or service at a lower price.
The cost avoidance process consists of several parts, including a reduction in the number of purchases (perhaps due to improved quality), a reduction in waste and consumption, and efficiencies delivered by utilizing a product or service.
As with sales revenues, cost savings are broken down into projected and realised savings. The projected savings are identified during the sourcing process. A supplier's realised savings will then be calculated as the sum of the cost reductions delivered and the cost avoidance saved over the duration of the supply contract.
By breaking down time periods into milestones, tracking savings over time becomes easier. As with sales revenue, these milestones can be easily analysed to provide valuable management information.
While financial savings may seem one-dimensional from a procurement perspective, it is the easiest benefit to quantify that is universally understood. However, there may also be other benefits such as social or environmental, although measuring these and directly comparing with others is more challenging. This situation will change in the future, which would have a positive impact for everyone.
To put themselves in the best possible financial condition, companies should therefore target both sales revenues and cost savings simultaneously.
It is easier for larger companies, especially those with more resources, to create processes and to formally monitor procurement savings. Smaller companies with fewer resources may benefit from one specific Savings Management software offered by oboloo. oboloo is an intuitive and simple solution that incorporates sourcing, contract and supplier management to enable companies to be supplier smart. To learn more please visit www.oboloo.com
These external articles contain useful information on Savings Lifecycle Management:
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