How To Calculate Procurement Savings
How To Calculate Procurement Savings
No matter what industry a business is in, it requires several items to operate. Materials, equipment, and primary products are all required. As well as repairs, training, and other services, companies sometimes require a wide range of services to maintain them. Such costs can accumulate, especially if they are not properly managed.
A top priority for every business should be procurement savings, however identifying the best method for reporting and assessing cost savings is challenging for many businesses.
In order to achieve strategic savings, you need to successfully implement the best reporting system. Measuring your procurement performance can be complicated and challenging.
In light of the ongoing effects of the pandemic, it is essential that businesses keep track of all cost reduction initiatives and strategic sourcing in order to survive harsh economic declines. This task is challenging, but not impossible.
What is Savings Tracking?
As the influential thinker on management, Peter Drucker, famously said ‘if you can’t measure, it you can’t improve it’.
Savings tracking refers to a method of estimating how much a company will save by using strategic sourcing and other cost-effective tactics.
To configure, manage, and track custom savings, procurement teams often use source-to-pay or finance software. A business can track both recognised savings and repayment agreements and unrecognised savings with advanced software. Using this method, tracking and reporting savings become transparent and accurate.
Stakeholders are able to estimate whether their cost-reduction and saving tactics are effective once they have this information at their fingertips.
To be successful with savings tracking, most businesses have to do four things:
- Reduce costs
- Risk management
- Creation of new services or products to increase turnover
- Increase cash flow
Cost Reduction vs. Cost Avoidance
The two may be related, but they are very different concepts when it comes to tracking procurement savings, and businesses need to track both to fully understand a procurement’s value.
Blog: Cost Reduction Vs. Cost Avoidance
Cost Reduction
Cost cutting refers to measures implemented by a company to reduce its expenses and improve profitability. Cost cutting measures are typically implemented during times of financial distress for a company or during economic downturns. They can also be enacted if a company’s management expects profitability issues in the future, where cost cutting can then become part of the business strategy. – Investopedia
Cost Avoidance
An avoidable cost is an expense that will not be incurred if a particular activity is not performed. Avoidable costs refer primarily to variable costs that can be removed from a business operation, unlike most fixed costs, which must be paid regardless of the activity level of a company. There are instances in which fixed costs can be avoidable costs. – Investopedia
Procurement Savings Tracking
In procurement, savings tracking is an approach to tracking the savings realised through cost reductions and strategic sourcing
Multiple savings projects will likely run at the same time at any given point in time. As a result, it is difficult to track savings and achieve desired savings targets. Software such as oboloo can help you optimise procurement savings by providing insights into your spending trends, savings opportunities, and resulting costs.
A procurement department’s key performance indicator (KPI) is procurement savings. To determine how well procurement strategies are working, procurement departments should focus on this primary indicator.
Why Procurement Savings Tracking Is Essential
According to a Deloitte survey from 2021, more than 85% of Chief Procurement Officers (CPOs) failed to meet their savings targets.
If a business wants to make smart decisions, tracking procurement savings is essential. It is imperative to track procurement savings in the right way because it directly impacts the organisation’s bottom line and other factors like risk mitigation.
No matter what the organisation’s size, industry sector efficiency, or procurement strategy maturity, realizing cost savings is important.
The reasons for this include increased outsourcing of tasks that were previously performed within the organisation. In addition, procurement is now responsible for commodities that were traditionally outside its purview, such as business travel, insurance, marketing communications, and professional services.
In order to improve the overall performance of an organisation, procurement strategies must be measured for success. Procurement systems that are more efficient will lead to more savings for an organisation. You can also steer the direction of your business more quickly when you have access to savings reports on a continuous basis, because you have pertinent and valuable information at your fingertips.
How do you Calculate Cost Savings in Procurement?
There is no simple formula for measuring cost savings. Moreover, procurement is not a purely standalone process; it is dependent in part on other disciplines. Consequently, measuring savings is difficult.
Compared to the new negotiated price, cost savings are always viewed as a negative change from previous costs. Without prior cost references, cost savings could be calculated from the first offer received or based on market benchmarks.
When it comes to procurement, how do you calculate cost savings? The average price of all quotes received is subtracted from the negotiated contract price by experts. The actual number of items bought during the period of calculation is multiplied by this value.
What Are The Essentials For Tracking Procurement Savings?
To track and measure cost reduction, big companies use complex processes and tools, whereas smaller companies may track savings via a spreadsheet (which is covered below).
Tracking cost savings requires understanding the following concepts:
Economic
- Cost Savings: comparing the results of current and prior year cost-saving initiatives.
- Cost Reduction: An impact on the balance sheet resulting from the levels before and after sourcing is referred to as capital reduction.
- Cost Avoidance: During the procurement life cycle, avoidance: avoiding price increases wherever possible.
- Addressable Spend: Includes expenditures that produce benefits.
- Total Procurement Benefits: is the total value created by purchasing. Cost savings, capital savings, and avoidance are added together to calculate the result.
Realised Vs Pipeline Savings
Adding to the bottom line when budgeting and protecting cash flow is the procurement team’s task as well as the finance department’s.
While cost-saving initiatives have been identified, actual realised savings when the contract is finalised may not match projections. To match predictions with realised savings, it is critical to realise cost reduction, avoidance, and stakeholder education.
You can devise strategies to overcome roadblocks and maximize procurement savings once you have identified the obstacles preventing you from realising optimal savings.
Understand that procurement and finance departments often approach “cost savings” in different ways, despite the fact that they are two sides of the same savings-driven coin.
Finance departments typically consider hard savings, or reducing costs by lowering existing costs and reducing business costs overall.
Meanwhile, procurement is looking for “soft savings” by avoiding costs. Through skilled contract negotiation and strategic sourcing, we can avoid or create additional costs (via cost increases). It is referred to as identified or expected cost savings.
How To Track And Measure Realised Savings?
Implement Cost Saving Practices
A procurement department should pursue its cost reduction plan while still recognising the value of the finance department’s cost avoidance efforts. In this way, the final Profit and Loss statement will show the connection between expected savings and realised savings.
You can save time & money by following the following steps:
- Are there savings over current pricing? How will the cost be avoided? By negotiating discounts or by leveraging economies of scale?
- Specify whether you are using historic spend data, industry trends, or resource availability as the sources of baseline data.
- Identify all areas for saving, including spend categories, general ledger codes, and relevant cost centres.
- You should provide a detailed analysis of all planned purchases, especially for negotiated spend that requires specific volumes in order to save money.
- If you have additional information regarding cross-dependencies and assumptions, such as market trends?
- Request financial approval for possible procurement savings. The goal is to ensure complete transparency, simplify budget reconciliation, and solidify procurement and finance as strategic partners in building organisational value.
Implement a Savings Management Software
Most organisations find it most challenging to track and improve realised cost savings at the contract award stage.
Obtaining procurement savings tracking is now easier and more manageable with a robust cloud-based savings software solution like oboloo.
How To Measure Procurement Savings?
Having covered the basics of procuring cost savings, how do you track them?
The finance and procurement departments of all organisations can monitor the costs that are saved by sales and marketing. Even if a cost savings is significantly smaller than sales revenue during a similar period, it can have a direct impact on profitability.
Getting a baseline level of current spend with a supplier is crucial to calculating and tracking procurement savings. As soon as the cost reduction and avoidance are calculated, we can subtract them from the cost.
The cost savings are broken down both into expected and realized savings, as with sales revenues. In addition, savings are identified in the sourcing process, so that the total of delivered cost reductions and cost avoidance savings is determined over the course of the supply contract.
You can break down downtime periods into milestones by tracking savings over time. By doing so, you can provide management with valuable information on downtime periods.
How To Track Procurement Savings
Every organisation tracks the revenue generated by its sales and marketing departments, and its finance and procurement departments can track the cost savings. Despite being less than the sales revenue generated over the same period, cost savings have the potential to impact profitability.
For procurement savings calculations and tracking, a baseline level of current spending with a supplier needs to be established. Next, both cost avoidance and cost reduction should be subtracted from this number.
The difference between expected and realised cost savings is the same as sales revenues. Furthermore, the sourcing process identifies the expected savings. Therefore, over the life of the supply contract, the realised savings will be the sum of the delivered cost reductions as well as the avoided costs.
It is better to track savings over time since you can divide downtime periods into milestones. In this way, valuable information about savings can be analysed.
Finding And Quantifying Savings Opportunities
All cost-savings efforts start with a solid spend analysis. Start there to figure out where you can save. Spend analysis is also good for verifying savings claim, and should include the following:
- Spend
- Spend per supplier
- Number of suppliers
- Spend per cost centre
- A comparison of measured values with benchmarks
It’s best if all stakeholders are involved in identifying saving options per commodity. Identifying alternatives and analysing them can help you save money and reduce impact. You can use the outcome analysis to set priorities and implement saving measures.
Securing Savings
Because the impact of saving varies with the type of saving, it is difficult to develop a unified method to implement saving. It’s more important to identify opportunities for saving that are actually converted into a reduction of expenses.
Benefits can only be realised through implementation
Procurement Savings Management Software Vs. Excel Spreadsheet
Once you have worked out how to effectively track and measure your savings within procurement you will need to access the best tool to use based on your business. There are two main options for you to choose from:
Digital Solution (Savings Management Software)
eProcurement software’s should offer an ‘Savings platform‘ which will allow you to run an track and measure savings.
The huge upside to using a digital solution is that it makes it standardised for your team and yourself when evaluating analysing. It also means that you do not need to worry about losing emails or documents associated to them as they are all stored in the system.
Be careful though, some of these can be extremely expensive as they are aimed at enterprise organisations however with newer cloud eProcurement software coming to the market, you should be able to find a cost-effective one for your needs. Check out our blog on how to select the right eProcurement software for your company. You can even try oboloo free for 30 days.
Traditional Format (Excel Spreadsheet)
This is often done by creating an Excel spreadsheet of all the savings activities undertaken throughout your organisation.
The cons to this format are that you run the risk of human error with multiple people accessing the same spreadsheet to enter constant updates as well as the file becoming corrupt and losing all records completely.
Another is that there is only a manual approval workflow which is not kept on record or timestamped. And finally, you will have to merge all of the savings activities by employee, month etc and transform the data into your preferred view, which a digital platform will do for you automatically.
Benefits of Procurement Savings Tracking Software
By using a procurement savings management software, an organisation can track the savings they’ve achieved through various strategies and cost cuts. It’s especially helpful when dealing with sourcing in the supply chain.
Due to its benefits, procurement savings tracking they’re becoming increasingly popular.
Using a Procurement Savings software enables organisations to:
- Utilise automated deep categorisation to find insights about spend trends and opportunities.
- Utilise savings reporting to track and share actual savings results as you complete your initiatives. Forecast future savings based on today’s efforts.
- Using the right procurement tools makes it easier to track and capture your spend.
Improved Procurement Savings Process
A poorly managed process is difficult to improve. Procurement savings tracking software is absolutely necessary if you’re going to be able to realise cost savings.
If you don’t know where the leaks are, how can you manage risk and plug them? By using procurement savings tracking software, it is easy to chart trends and identify gaps, as well as identify, analyse, and rectify cost savings problems.
Efficient Procurement Savings Project Tracking
There are usually a bunch of procurement campaigns going on at once in procurement teams. Spreadsheets aren’t enough to keep track of all those costs in big organisations.
A procurement savings tracking software helps streamline the entire process, making it easier for your organisation to track all cost-saving strategies in one place.
Visibility
You can track procurement savings in real time with procurement software. Without a Procurement Savings Software, anyone who wanted a clear picture of how much savings the procurement department has been able to achieve, it was necessary to wait until finance department reports were published.
Savings Data
Data can be shared and reviewed with stakeholders easily through procurement software. It’s easy to hold meetings anywhere to show the savings you negotiated and overall savings you achieved. The procurement team can show off the results and metrics they got by setting milestones. That way, the organisation can make better decisions on purchase.
Additional Resources
These external articles contain useful points to consider:
