How do you calculate your savings performance? This is a recurring question and I found a nice thread on linkedin “Savings performance calculation” which I wanted to share. Here are some excerpt:
There is no ideal way to make all functions happy within the organization. For indirect, like services, we define procurement saving/effect as final price after tender/negotiations vs. lowest initial bid/price before procurement negotiations… Vladimir Zhuravel, VP Supply Chain at Carlsberg Baltic
… There are on the other hand companies, which mostly buy non-repeated items, or items which are not easily comparable to items bought previous year. These are compenies like telecoms, energy companies, banks etc. These companies therefore can’t report savings based on current price vs. last year price and their job couldn’t be measured, evaluated. Therefore they use mainly the formula best price from initial round of quotations vs. final price or price of the winner of tender before negotiations vs. price of this winner after negotiations… Robert Sobcak – Procurement Professional
Presenting one big savings number to executives will likely be poorly received in an environment of rising expenses, particularly when most purchasing departments accompany that “one big number” with little if any supporting detail. Therefore, it is helpful to divide your impact into a number of classifications, including:
1. True expense reductions
2. Offset increase in volume with decrease in price
3. Partially offset new expenses through negotiation
4. Price increases
5. Partially offset rising price of volatile commodities
6. Those areas you didn’t address
Charles Dominick, President at Next Level Purchasing, Inc. and Owner, Next Level Purchasing, Inc.
To complete was was already said on this thread, I would suggest myself to base, ideally, savings calculation on 5 must-have metrics:
- External ‘Price’ reference before and after: Category Market Price index(es)
- Price Before and after: Price Y-1, or (if not available) reference-price in budget & the new negotiated price
- Your Company volume reference before and after: for example Turnover, # of units sold, FTEs.
- Volumes before and after: Consumption Y-1 & consumption of current year
- A business/CFO buy-in of your Savings performance calculation ruling, which includes above for each category.
Bottom line, I mean that the real-savings generated, ‘easily’ calculated with price and volume variation, has to be related to your company growth/decrease as well as to external market evolutions.
Easy to say, as always, the devil is hidden in your company capabilities ‘to hear’, ‘to act” and ‘to change’. Although you shall definitly think big, you have to act small and start with one category. Purpose at start is to get the most important: credibility and business/CFO buy-in.