Complexity Surrounding Procurement Function

In our previous blog, we explored the various types of savings. To further continue, our next topic for discussion brings us to exploring the numerous complexities that surround procurement savings. 

In regards to the previous blog, it’s indicative that there isn’t a specific method to measure cost savings. Another concerning issue related to procurement is the misconception of being an isolated discipline instead it operates in cooperation with other departments and is considered partially dependent. This ultimately makes both measuring and gauging the true value of savings a bit complicated. Lastly, the definition of ‘savings’ is an issue as there are always ramifications and discussions surrounding the legitimacy of reported savings between procurement and finance department. To understand the above-stated complexities here are some examples which illustrate the existing problems in detail –

• Procurement induces negotiations to gain favorable terms and prices for products/services. Suppose for an enterprise the demand for a product in the next period will be higher and the procurement department successfully negotiated a lower price deal. Despite the negotiated lower price, the overall expenditure incurred could be higher for the commodity. In the opposite scenario, a price rise coupled with ease in demand could also lead to a reduction in overall expenditure. Procurement is always surrounded by such uncertainties, therefore, it’s important to mitigate such risks by proper management of contracts, vendor, and inventory.
• Based on business requirements, a buyer initiates a tender for new product/service and through successful negotiations, he attained a 10% additional discount. Despite reported savings, overall expenses increase. A common method to calculate procurement savings = [Average price of all received quotes] – [Negotiated contract price] x [Real number of items bought in certain period]
• Suppose a buyer deals with a volatile commodity and in a specific period, price increased by 25%. Through commendable negotiations, the buyer was able to limit the rise to 15%, hence reported 10% savings. Despite reported savings, overall expenditure increased by 15%.
• A sourcing project can lead to adequate savings in terms of time and money. Proper logistics management can help in achieving the savings target. At the same time, costs may increase due to the consequences of late deliveries, poor quality products delivered, wear and tear, etc. To efficiently manage sourcing related issues, an e-procurement tool comes in handy.

To conclude, issues surrounding the procurement function concerning the realization of savings is perceived as a constant tug-of-war between finance and procurement department. To minimize complexities it becomes extremely important to diligently measure and report procurement savings as per a pre-established framework. Before we dive into how to establish a framework to measure and report procurement savings, let’s understand the importance of measuring and reporting procurement savings -

• Continuous Improvement – Knowledge about price trends, latest developments in the existing sector, and related recent affairs help in planning desired targets and comparing actual performance to spot any deviation and executing a remedial plan for any contingency. Being in-sink with the strategy always help to continually improve.
• Showcasing Value-Added - The primary reason for a procurement department existence is to effectively manage and minimize maverick expenditure within supply chain operations. The procurement department prima-facie to effectively curtail and control costs to improve profitability depict value-added.
• Improves Credibility – Procurement function requires to work in harmony/cooperation with all disciplines within an organization and adding value via showcasing a good track record in curtailing costs improve procurement’s credibility. 

Measuring and reporting is an extremely important task as it not only influences data insights and subsequent strategies but can also hamper cost-saving opportunities, if not managed properly. To know more about how to effectively measure and report procurement savings, stay tuned for additional posts in this series.