How do you measure and report procurement savings?

Procurement cost can be divided basically in to Cost of procurement &Cost on Procurement. We may save from both by quantitative measurement &proper metrics Cost of Procurement may be reduced by continuous VA/VE i.e without compromising the desired quality how the utility value be best achieved by Value Engineering by material/design change as a cost reduction technique. Cost on procurement focuses to the reduction of procurement Lead time cycle by continuously following up for Internal &external lead time. Indenting/PR, tendering/ negotiation order placement is ILT, date line for each day to be strictly controlled.delay means the ordering cost increases. In Ex.LT till receipt of goods a system based follow up reduces the cost on procurement

Procurement savings are typically measured and reported through the analysis of cost reductions, negotiated discounts, and process efficiencies achieved in the procurement process

Measuring and reporting procurement savings is essential for demonstrating the effectiveness of procurement efforts and identifying areas for improvement. This refers to the savings achieved by avoiding costs that would have been incurred without the procurement initiative. For example, negotiating lower prices with suppliers or implementing cost-saving measures in procurement processes. Measure the difference between the original price and the negotiated or new price for goods or services procured. Measure savings resulting from streamlining procurement processes, reducing cycle times, and eliminating waste. This can include savings from improved inventory management, reduced paperwork, or decreased processing times.

Cost avoidance, pricing benchmarking, supplier performance, process efficiency, volume discounts, contractual savings, total cost of ownership, cost per unit, compliance savings, and technology adoption are some of the ways you can track and report procurement savings.

Note: Whether you’re tracking, hard savings or soft savings/avoidances, it’s just as important to capture “missed” cost savings as some value cannot be realized for various reasons outside procurement’s control. You may also want to capture what lever(s) used in the process.?? Tracking can be done manually as simple as on a spreadsheet (yes it can), or captured using technology systems having dashboards and reporting functionality. Tracking savings is a critical part of KPIs of any procurement department which is often overlooked as they are busy "firefighting" in tactical mode. cont...

Fool's Gold is a procurement saving which has been claimed when; a. There has been a favorable shift in the underlying market conditions for the goods you are purchasing which has resulted in a unit cost reduction; or b. You have negotiated a 5% cost reduction from your supplier without benchmarking it against the prices being paid by the competition. A 5% reduction on a poor deal may still be a poor deal. or c. Entering into a long term 'fixed price' agreement without understanding the risk premium being paid for the privilege of enjoying the cost certainty. Savings are great, however they need to be transparent in order for them to be properly claimed as being real gold

I have seen many generic approaches : Hard Savings, Soft Savings, Cost Avoidance etc. While these approaches work but the debate (from a CFO perspective) has always been whether the Cost Savings really reflect in the bank. In my view, the only way to ensure alignment with CFO on savings is to ensure the savings gets tied up with the budget and TCO. In simple terms, there should be no overspending from the budget or budget diversion because of the savings (or lower cost achieved) by Procurement.

Procurement savings contribute to the financial health and competitiveness of an organization. Efficient procurement practices not only reduce costs but also enhance the value derived from goods and services, supporting overall business objectives. It's essential for organizations to measure, track and report these savings accurately to demonstrate the effectiveness of their procurement strategies.

The statement is focused on the private sector context, but procurement savings are equally important to public/government organisations. This is often overlooked in budget-funded entities such as governments and international organisations. There is a huge emphasis on the control of budget requirements to keep costs within affordable levels while we focus on the compliance aspects of procurement, overlooking the huge potential of the procurement function to achieve budget savings (and other organisational objectives) through the design and adoption of appropriate procurement strategies.

Procurement savings are crucial for enhancing the financial performance and competitiveness of an organization. By reducing costs and maximizing value from supplier relationships, procurement savings contribute directly to the bottom line. Additionally, savings generated in procurement can free up resources for investment in innovation, growth initiatives, and strategic priorities, ultimately driving business success.

Procurement champs boast of savings, but measuring those treasures? More like navigating a financial reef. First, define "savings" - price drops, waste avoidance, value boosts? Then, categorize them. Now, the real challenge: Baseline: Market? Historical? Budget? Each has its snags. Figure out the actual cost, factoring in inflation, exchange rates, and volume changes. Now, choose your formula: net present value? Annualized savings? Cold, hard cash? Each tells a different story. Finally, the key: validate. Scrutinize those numbers, don't just celebrate. This isn't Monopoly - it's real business.

Measuring report procurement savings involves analyzing the financial benefits gained from the procurement of reports. Key steps include: 1. Defining metrics and key performance indicators (KPIs) 2. Gathering data 3. Calculating cost savings 4. Calculating cost avoidance 5. Assessing efficiency improvements 6. Analyzing return on investment (ROI) 7. Monitoring and tracking the savings over time These steps help determine the effectiveness of procurement strategies and identify areas for improvement. Regular monitoring and evaluation are crucial to establish a baseline for comparison and consistently track metrics to identify trends and areas for optimization.

Em uma empresa onde trabalhei, separamos a equipe de cadastro de itens e a equipe de compras. A equipe de cadastro era responsável por cadastrar os itens no sistema e também por manter uma atualiza??o sobre o pre?o médio dos itens. Assim, a equipe de compras conseguia objetivamente avaliar o resultado de suas negocia??es com base no pre?o médio cadastrado por outra equipe.

Measuring procurement savings involves several key steps and considerations, tailored to the specific needs and practices of an organisation. Defining the Scope and Categories of Savings =i dentify what types of savings will be considered. This can include cost reductions, cost avoidance, or other value-added benefits. Establishing Baseline Costs - determine the initial cost of goods or services before any procurement initiatives. This baseline can be based on historical prices, market prices, or budgeted prices. Calculating Actual Costs - after procurement initiatives, calculate the actual cost of the goods or services. more in the next comment

Procurement savings can be measured by calculating the difference between actual cost versus a cost baseline. The baseline can be previous year cost, market price, budget reference or other reference cost.

Reporting procurement savings effectively involves presenting the information in a clear, concise, and meaningful way to various stakeholders. Here is some steps on how to report procurement savings: 1. Establishing of saving categories, 2. Creating of quantitative data, 3. Clarification of tangible and intangible savings, 4. Benchmarking, 5. Feedback and lessons learned

A lot of excellent points. The addition I would make is that companies need to make sure that they do not invest vast sums of money and resources in measuring and reporting. Invest the minimum to ensure a clear, transparent, accurate and automated approach and use the rest of the money to focus on actually delivering the cost reductions. I have seen many teams spend countless hours trying to get the data to meet reporting needs or having to clean and change data to meet a format. We had a saying in one of my companies - "you can weigh the pig 3 different times but it won't make more bacon - to make more bacon you have to feed it!". So stop "weighing" and work with your suppliers and teams to actually take out the cost.

Key elements of procurement savings reporting include: Clear documentation: Provide detailed documentation of the savings calculation methodology, including the assumptions and data sources used. Presentation formats: Present savings reports in a format that is understandable and accessible to the intended audience, such as tables, charts, or dashboards. Contextual information: Provide context around the savings achieved, including the impact on budgetary goals, strategic objectives, and overall organizational performance. Regular updates: Report procurement savings regularly, such as on a quarterly or annual basis, to track progress over time and demonstrate the ongoing value delivered by the procurement function.

Insights on procurement performance and link to business performance should feature in different types of reports including: Procurement Performance Reports: Regular reports that should include specific savings achieved, categorized by different procurement categories, vendors, or cost centers. Financial Reports: Procurement savings should feature prominently in budget review meetings to understand the impact of procurement on overall financials. Executive Management Reports: Insights of procurement savings should be included in executive reports focussing on how procurement contributes to strategic business goals. Annual Reports: Including procurement savings in annual reports highlights process and operational efficiency.

Measuring procurement savings involves comparing actual costs to potential expenses without procurement strategies, considering factors like discounts, cost avoidance, and process efficiencies. Metrics such as savings percentage, ROI, and TCO are common. Organizations use procurement software and audits for streamlined data collection. Clear communication of these metrics to stakeholders is essential, showcasing the concrete impact on the organization's financial health.

To enhance procurement savings, here is an effective strategies and best practices: 1. Effective supplier collaboration 2. Strategic sourcing 3. Benchmarking 4. Technology adoption 5. Data analytics 6. Centralized procurement 7. Demand management 8. Continuous supplier evaluation 9. Risk management 10. Feedback mechanism 11. Regular audits

Here are top 10 ideas! 1) Low cost country outsourcing 2) Design to Cost Modelling 3) Create Purchasing Bundles 4) Product Substitution (Competitive Version) 5) Consolidate Indirect Purchases 6) Change Cost Model (From Capex to Opex or Vice Versa) 7) Rebaseline Index based price formulae 8) Optimize Incoterms (FOB vs CIF) 9) Payment Terms Optimization 10) Early Contract Renewal Opportunities For more such ideas, follow me on Linkedin.

Here are 16 tools that I've used: On the demand-side: demand management, value engineering/analysis, should-cost modelling, specification management, demand aggregation, optimised order quantities, demand forecasting & commitment. On the supply-side: benchmarking, supply chain mapping, supplier consolidation, consortium purchasing, competitive bidding (traditional tender and e-auction), negotiation, discounts rebates and incentives.

In my experience, the first and foremost requirement is to have should be cost / benchmarking / technical cost of the equipment. The other aspects in procurement savings is Strategic sourcing which covers all possible aspects of supply chain optimization and innovation.

Alguna vez lei de una empresa que cuando compras lograba un ahorro para un área, se le retiraba el dinero de su presupuesto y se colocaba en una cuenta contable de ahorros con lo cual se aseguraba que este no se gastara en otras cosas. Ese dinero se podía reasignar mediane justificaciones pero quedaba el registro para compras. Si no se relaciona el presupuesto con el ahorro y se promueve el uso de presupuestos base cero, las áreas tienden a gastar lo más posible para que cada a?o les den más dinero y entonces el esfuerzo de compras se evapora. Si el ahorro no llega a la utilidad porque se gasta o se pierde por impactos negativos en la operación o la productividad no es un beneficio real.