Do You Measure Procurement Savings?
Every company prepares annual accounts that summarise its financial health and over time comparing them is a measure of how well its doing relative to previous years. These accounts are a top-level summary of the numbers, may be viewed externally and are limited in the amount of detail that they show.
As the influential thinker on management, Peter Drucker, famously said ‘if you can’t measure, it you can’t improve it’.
This has become increasingly true of companies who strive to grow year on year. Any improvement in a company’s sales is tracked by measuring it over time to show the actual performance compared to the forecast and the previous year. These numbers can then be broken down further to give more insightful information as to how best improve the performance to increase revenue and ultimately profitability.
Another measurement that is becoming increasingly important to track is the financial success of procurement and purchasing to deliver savings derived from for a particular spend category or supplier. As with sales, there is a measure of both pipeline savings and actual realised savings that can be further interrogated to gain valuable insights.
Savings are calculated by understanding the baseline level of spend and taking away from this both cost reduction and cost avoidance. Cost reduction is the amount saved by purchasing a good or service at a lower price. Cost avoidance is a little more complex and is made up of several parts, these include a reduction in the number of purchases, a reduction in waste and consumption, man hour efficiencies delivered by using the product or service.
Measuring both sales revenues and procurement savings can be used to justify investments in marketing, staff, technology etc. Companies can use a variety of methods to measure and track savings from spreadsheets to a procurement savings lifecycle software.
A procurement savings tracking software allows companies to measure their commercial savings under one centralised dashboard offering savings visibility throughout the procurement savings lifecycle and savings validation with approvals. Capturing results and measure savings performance, getting real-time visibility of all negotiated savings and validating realised savings is becoming increasingly more important for companies according to Deloitte’s CPO 2021 Survey.
Its’ important to bear in mind that savings is not the only measure of the success of a procurement process as there are other considerations, which are more difficult to measure. However it’s the most commonly used as its easiest to define goals and to record. The recently released Deloitte CPO 2021 Survey shows that reducing costs is the top priority of 76.4% of CPOs, just behind driving operational efficiency. For the previous ten years cost saving was the number 1 priority.
For many companies, especially larger ones, who have more resources, this is easy to do either using staff or using technology. For those companies with fewer resources there is one Savings Management solution that has been designed specifically for SMEs called ‘oboloo’. It’s an intuitive and simple solution that also incorporates eSourcing, Contract and Supplier management to enable companies to be supplier smart. To learn more please visit www.oboloo.com
Additional resources
These external articles contain useful information on Savings Lifecycle Management: