No matter the sector, every firm requires certain products. Primary goods to complicated materials and machines are included. Repairs, training, and other services are typically needed to maintain a company. Unless managed well, these expenditures pile up. Every organisation should prioritise procurement savings. Many companies struggle to discover the best way to record and measure cost reductions.
Measuring procurement performance is difficult, but establishing the right reporting system is crucial for strategic savings.
To withstand hard economic downturns, firms must follow all strategic sourcing and other cost reduction activities, which is difficult but not impossible due to the epidemic.
We created this guide to help you track your business’s procurement savings. We provided the information you need to start savings monitoring in your procurement plan.
Saving tracking
Most procurement teams configure, administer, and track bespoke savings using “Source-to-Pay” or financial software. Advanced software tracks recognised and unrecognised savings and repayment arrangements according corporate policy. This makes savings monitoring and reporting transparent and accurate.
Once stakeholders have the information, they may estimate and evaluate their cost-cutting and saving strategies.
Savings monitoring requires four steps in most organisations. These are:
- The company must cut costs.
- Risk management is needed.
- Adding additional services and products to increase market value.
- Cash flow must rise.
Savings monitoring can only succeed if all organisation stakeholders strive towards it.
Cost savings vs. avoidance
Before continuing, we must distinguish between cost savings and avoidance. Despite their similarities, procurement savings monitoring is distinct, and organisations must measure both to understand procurement’s complete value.
Cost avoidance
CIPS says:
“Cost avoidance is a cost reduction that lowers spending.”
Let’s say you pay an internet provider annually. The vendor sends a 10%-increment renewal contract. Your bargaining abilities save you 10% by signing a long-term renewal contract. This avoids costs.
Cost-cutting
But cost savings are more evident. Cost-savings are money saved by a corporate policy change that lowers operating costs. Both employers and employees must develop and implement cost-saving measures that generate revenues.
For cost-saving initiatives to succeed, the organisation must execute policies. However, the employee or procurement team is solely responsible for meeting requirements.
You might negotiate a lower per-unit pricing to make your sourcing cheaper, saving you money.
Types of cost savings
We must first understand the cost reductions most organisations make before contemplating procurement cost optimisation. These are:
1. Past savings
Compare unit price changes to the prior period. Historic savings are calculated using last year’s baseline. So it may be from a vital sign like last year’s pricing average. These indications are compared to the current price and the difference is computed.
2. Budget Savings
Calculated by subtracting the invoice price from the estimated budget.
3. Technical savings
Product technical specification modifications result in technical savings. For instance, a technological saving occurs when a cheaper product substitutes a costly one.
4. RFP savings
Request for Proposal (RFP) is a ‘avoidance’ savings method. Why? Due to supplier proposals, the organisation might pick a supplier. Most often, the lowest bidder wins.
5. Index savings
These savings come from external market changes that impact material and service pricing.
6. Savings ratio
These are savings combinations. Thus, technical and monetary reductions may be included.
Tracking procurement savings
Tracking procurement savings? In procurement, ‘savings tracking’ means monitoring cost reduction and strategic sourcing savings.
Truthfully, numerous savings programmes will operate simultaneously. This makes tracking and meeting financial goals difficult. Simfoni software helps you maximise procurement savings by revealing expenditure trends, savings prospects, and cost realities.
In many organisations, procurement savings are the top KPI for procurement departments. To assess procurement strategy success, procurement departments must focus on one major indication.
What’s so crucial about tracking procurement savings?
A firm needs procurement savings tracking to make informed judgements. Procurement savings affect the company’s bottom line and risk mitigation, therefore tracking them properly is crucial.
Delloit revealed that over 79% of Chief Procurement Officers (CPOs) believe procurement savings tracking is the first step to improving an organization’s future.
Cost reductions are vital regardless of organisation size, industrial sector efficiency, or procurement strategy maturity. Since most companies spend 50-70% of sales on procurement, this is not unexpected.
The organization’s outsourcing of tasks has increased for numerous reasons. Procurement now handles company travel, insurance, marketing and communication, and professional services.
To improve performance, an organisation must measure procurement strategy success. A more efficient procurement method saves money. When you obtain savings data regularly, you can swiftly orient your business since you’ll have relevant and important information.
Savings monitoring is like insurance against unexpected costs.
Besides increasing profitability, tracking and reporting procurement savings has further benefits:
1. Continuous enhancement
You know your savings status when you measure them. Knowing pricing trends and how procurement is influenced exposes departures from intended results. It simplifies implementing particular procedures to address unwanted results.
2. Value Addition
Since procurement is crucial to an organization’s profitability, establishing cost control’s worth is only sensible.
3. Enhance Credibility
Organisational disciplines and departments collaborate on procurement. It must work properly in all areas and disciplines to succeed. Thus, a successful cost savings record boosts procurement’s credibility and puts it at the forefront of future expenditure efforts.
Why Excel or Google Sheets Cannot Track Savings
You may assume, Excel and Google Sheets have tracked procurement savings with no problem for decades. This classic method was considered the gold standard for procurement savings tracking. It’s still inefficient, especially with improved tools.
Excel has several advantages, including:
- Very user-friendly and inexpensive. Excel may be preferable for small businesses.
- You can handle many topics.
- It’s a common organization-wide tool.
- Little to no money is needed.
While these benefits may appear justified, Excel or Google Sheets have procurement savings tracking restrictions. Data dependability, correctness, cooperation, etc. are lacking in these technologies.
Why avoid using Excel to track purchase savings?
1. Excel is unreliable
Manually entering hundreds of lines and columns of data makes it easy to make a catastrophic mistake. With all this traffic, finding this mistake is difficult. Additionally, one error can render all Excel spreadsheet data unusable.
2. Bad data interpretation
Because the interface merely shows rows of data without analysis or dashboard, it is simple to misread. This makes data interpretation and planning difficult.
3. Making updates is difficult.
Data updating in Excel might be difficult. Real-time data synchronisation is time-consuming, especially when programme versions change or upgrades occur.
4. Excel hinders cooperation.
Excel makes project tracking and team management tough. When was Excel ever selected for collaboration?
Excel isn’t a good savings tracker. It’s not meant to help procurement and finance departments collaborate.
Data insecurity, unreliability, and cooperation issues are too numerous.
Procurement Saving Types
Cost-saving opportunities exist in three procurement sectors. These are:
1. Managing Purchase Demand
One of the easiest ways to save costs is to reduce demand. Three methods are available.
- Reduce consumption: Ask yourself, “Do we need this?””. The question is simple yet rarely asked. Most companies buy items they could do without, especially during economic expansion, and cease when conditions worsen. Examples include eliminating business class and lowering plane travel with video conferencing.
- Spend consolidation: Avoiding hidden costs and conserving money might be beneficial. For instance, companies may track their mobile phone, laptop, and automobile lease spending.
- Improvement of specification: Technicians are perfectionists and typically seek the most appealing but most costly solution, even if a cheaper one exists.
2. Manage Supply Base
Supply base management involves cost-effective supplier usage.
- Consolidating supplier connections: Businesses benefit from supplier partnerships. Managing and consolidating supplier collaboration, building alliances, and seeking ongoing cooperation can save costs.
- Increase competition: The reverse of the first point. For an organisation, supplier competition may improve procurement efficiency.
- Restructure supplier relationships: Low-cost nations provide cost savings. Companies can also distribute product demand among numerous providers, creating continual rivalry.
3. Total Cost Management
Reducing demand or direct-purchase charges is the easiest approach to cut procurement costs. However, product or service acquisition costs may be estimated, which may include benefits like:
- Total supply chain cost optimisation
- Reducing overall life cycle ownership costs: This evaluates expenses after the initial product price.
- Reduce or eliminate transaction costs: Transactional expenses are often underestimated despite their importance in ordering, receiving, and paying for products.
The procurement savings summary above deserves closer examination. One standard formula cannot measure accurately. Most of this is because procurement involves other parties and departments. This makes measuring savings difficult, but it’s not impossible.
How do you calculate procurement cost savings?
Unfortunately, there is no conventional formula for cost reductions. Procurement also depends on other disciplines. This makes cost reductions difficult to quantify.
Always perceive cost savings as a negative shift from historical expenses to the new negotiated price in procurement. Cost reductions can be determined from the initial offer or market benchmarks without a cost reference.
How do you quantify procurement cost savings? Experts remove the average quote price from the agreed contract price. This amount is multiplied by the number of products purchased in a period.
Key Cost Savings Tracking Concepts
Before discussing procurement cost savings tracking, we must understand the principles and aspects.
Our research shows that procurement is one of the best ways to save costs quickly and significantly. Large companies track and assess cost reduction with complicated procedures and technologies. Smaller organisations may measure cost reduction with a spreadsheet, which we’ve already proven is inefficient.
These notions are essential for tracking cost reductions.
1. Economic Ideas
The most important step is to specify each measure’s criteria with the finance department. Five key economic principles are below:
- Addressable Spend: Spend that yields advantages.
- Cost savings: how cost-saving measures affected the income statement this year vs last year.
- Capital Reduction: the balance sheet adjustment due to pre- and post-sourcing levels. Inventory, capital assets, and payment periods are examples.
- Avoidance: when a corporation avoids price increases throughout the procurement life cycle.
- The overall value produced by purchasing is total procurement benefits. To calculate it, add cost savings, capital reduction, and avoidance. It would indicate the outcomes if procurement had sourced or not.
2. Realised vs. Expected Savings
Many firms struggle to maximise business spend returns. Procurement and finance must enhance accuracy, usefulness, and profitability while planning and preserving cash flow.
After the contract is signed, cost-saving efforts may not match predictions. Realising cost reductions that match projections involves understanding cost reduction, cost avoidance, process optimisation, and stakeholder education.
After understanding the barriers to optimal realised savings, you may build ways to overcome them and maximise procurement cost savings.
To illustrate the difficulty, consider that procurement and finance departments typically view “cost savings” differently, even though planned and realised savings are two sides of the same savings-driven coin.
Cost savings and tracking in finance focus on “hard savings.” The department tries to save expenses by lowering current costs or general company costs.
While procurement seeks “soft savings,” cost avoidance methods are used. Skilled contract negotiation and effective sourcing can prevent cost hikes or provide savings. This is called identified or projected cost savings.
An example from actual life:
Suppose your company spent $30,000 transporting a product last year. The procurement department may advise switching logistics firms to save expenses by 15% in the coming fiscal year. The estimated savings are $4,500, 15% of $30,000.
The predicted cost reductions will only be realised if:
- Everyone follows the new contract and uses the logistics vendor.
- The vendor promises to follow the contract.
These cost reductions are monitored over 12 months after contract completion, so they take time to appear. Thus, we cannot confirm the predicted savings until a year following the agreement.
Other obstacles to projected savings
The difference between projected and actual savings is difficult to close. Because any party might fail to satisfy their responsibilities at several instances. This is especially true if your procurement strategy lacks the means and technology to effectively manage spend, receive and pay bills on time, and minimise risk from rogue or maverick spend, invoice fraud, etc.
Here are a few additional challenges to consider:
- Poorly optimised invoicing systems: Paper invoices and manual operations raise the risk of issuing duplicate or inaccurate invoices. Longer staff work hours will increase costs. Employees must now spend hours pursuing exceptions or missing or unsent invoices to pay on time.
- A lack of internal controls can lead to organisations employing alternative suppliers to cut costs, which raises costs due to contract breaches.
- Wild spending: Hard to track and put into resource allocation budgets or forecasts. This will affect cash flow management.
- Insufficient strategic sourcing: Inefficient procurement may stem from poor analysis and forecasting techniques. An organisation may purchase less than expected and miss the volume discount rate.
Whatever the cause, the difference between projected and realised savings causes the firm problems beyond the bottom line. Accurate firm expenditure data aligns procurement and finance goals, improving budgeting, cash flow, and supply chain optimisation.
Measure and Maximise Realised Savings
How can you maximise procurement savings and budget? We have some advice on how to adjust your attitude to maximise savings.
1. Cost-Saving Habits
All cost-saving and strategic sourcing efforts must cooperate. Instead of competing, your procurement staff should reduce costs while acknowledging the finance department’s cost avoidance efforts.
This synergy will formalise the link between projected and realised savings on the P&L.
Use these steps to adopt a cost-saving practice:
- Will the savings help pricing? Cost avoidance through negotiated discounts or economies of scale?
- Does baseline data come from past spend, industry trends, resource availability, etc.?
- Record all savings possibilities’ expenditure categories, GLP codes, and cost centres.
- Detail all expected purchase volumes, especially for negotiated expenditure that requires precise amounts to save money.
- Include market trends and other cross-dependencies and assumptions.
- Receive financial clearance for procurement savings. Complete transparency, simplified budget reconciliation, and procurement and finance as strategic partners in organization-wide value creation are achieved.
2. Implement P2P Software
Detailed invoice monitoring is most organisations’ primary issue in measuring and enhancing realised cost reductions. Manually inputting, monitoring, and confirming each invoice is complicated.
Maverick waste and inefficient processes like paper approvals and snail mail invoices and payments worsen matters. You can’t prevent rising expenditures, so forget about saving.
3. Prioritise Strategic Sourcing
Investment in a streamlined, robust supply chain with providers that share your values and objectives is crucial. They must also fulfil your performance, pricing, and compliance needs.
To maximise cost reductions, deploy technology that enables shared achievement.
Tracking procurement savings
After covering the basics of procurement cost savings, how do you track them?
All organisations may measure finance and procurement cost savings as well as sales and marketing income. Cost reductions may affect profitability even when they are much lower than sales income.
A baseline supplier expenditure level is needed to calculate and track procurement reductions. After calculating this value, remove cost reduction and avoidance.
Cost reductions are predicted and realised, like sales income. Since predicted savings are discovered throughout the sourcing process, the realised savings will be the sum of the achieved cost reduction and cost avoidance savings across the supply contract.
Tracking savings over time lets you split downtime into milestones, which is preferable. Management information is easy to analyse and distribute using this procedure.
The right technique to measure and report savings has three parts:
1. Determining method and framework
It’s not enough to know what to track; organisations must agree on savings kinds.
Your organisation must compute numerous forms of savings as they are all distinct. Calculation formula and beginning locations must be determined. Consider these questions:
- Do you measure per product or category?
- Do savings occur monthly, quarterly, annually, or contractually?
You must also explain how savings will be verified and reported, especially when several departments source. Make it clear which team can claim protection.
2. Finding and measuring savings possibilities
A solid expenditure analysis must underpin all cost-saving efforts. Start here to find savings possibilities. Spend analysis can validate reported savings and should contain the following data:
- Spend
- Number of suppliers
- Supplier-specific spend
- G/L account and cost centre spend
- Comparing measured values to benchmarks
To incorporate all stakeholders, commodity-specific saving strategies should be identified in multidisciplinary teams. Alternatives must be identified and assessed for savings and impact. After this outcome analysis, you may define priorities and choose saving measures.
3. Savings implementation and security
Because saving effects vary by type, implementing a unified method is difficult. The goal should be to create savings opportunities that reduce expenses.
Implementation is key to reaping benefits. Good intentions alone won’t work.
Purchasing Savings Software
A procurement savings management software helps an organisation track cost-saving measures and strategic sourcing by the procurement team. This is crucial for supply chain sourcing.
Digital procurement savings tracking is becoming more popular due to its benefits.
It works how?
Simfoni’s software simplifies strategic sourcing and cost-saving by providing all the information you need on a single, intuitive interface. Our software helps procurement and sourcing teams save and motivates them by showing their results.
You can also:
- Use rich data from automated deep categorization to analyse spend trends and opportunities.
- Savings reporting lets you track and share savings after each initiative. Forecast savings from today’s work.
- Find ways to save. Base priorities on estimated savings and ease of completion.
- Everyone using the right procurement tools makes spending easier to track.
Benefits of Procurement Savings Tracking Software
After defining a procurement savings tracker, what are its benefits? We chose five, so let’s look.
1. Plug leaks faster.
Poorly managed processes are hard to improve. Procurement savings tracking software is essential for cost savings improvement.
Think about this. How can you manage risk and stop spend leaks without knowing where they are?
2. Easily manage projects
Most procurement teams run multiple sourcing and procurement campaigns. Excel spreadsheets and Google sheets can’t track all those costs in larger organisations.
The procurement savings tracking software streamlines the process, allowing your company to track all cost-saving strategies in one place.
3. Customise your sourcing
Do you want to quietly cut costs? Simfoni’s procurement software secures your data using composable procurement, where you choose best-of-breed software modules from the same vendor to work seamlessly with your existing systems.
4. Current visibility
Traditionally, the procurement department had to wait for finance department reports to show how much they saved.
5. Easy data sharing
Sharing and reviewing data with stakeholders is easy with procurement software. Meetings can be held anywhere to demonstrate negotiated and realised savings. Procurement teams can show milestones achieved with actual results and metrics. This data can help the company improve its procurement strategies.
Common Questions
What’s savings tracking?
Savings tracking involves measuring your financial savings and spending over time. It involves keeping a detailed record of cash saved, allocated, or designated for various purposes. Example: unforeseen bills, retirement, or financial goals. Tracking savings helps people and organisations make educated financial decisions by revealing their financial progress.
What are procurement savings?
Savings in procurement relate to cost reductions or financial gains obtained by strategies, agreements, or process improvements in an organization’s procurement and supply chain. Negotiating better supplier prices, optimising supply chain operations, and improving procurement procedures can save money.
How can companies measure procurement savings?
Organizations can track savings in procurement by:
- Cost Analysis: Conducting cost analyses to identify areas for potential savings.
- Negotiate supplier terms to get better costs.
- Contract Management: Tracking contracts for compliance and cost savings.
- Reduce operating expenses by optimising procurement procedures.
- Evaluation of supplier performance to find cost-effective choices.
How might savings tracking boost financial performance?
Organisations can improve financial performance by measuring savings:
- Continuously checking spending and finding ways to save costs.
- Monitor budget adherence and variances.
- Resource Allocation: Efficiency in financial resource allocation for growth and strategy.
- Supplier Management: Negotiating favourable conditions and monitoring suppliers.
- Data-driven decision-making: Using savings data to plan investments, expansion, and resource allocation.
How can companies measure procurement savings accurately?
Organisations can measure procurement savings accurately by:
- Keeping procurement data accurate and current.
- Strong Systems: Implementing trustworthy procurement and data management software.
- Regular Audits: Verifying savings estimations and compliance.
- Partnering with suppliers to verify cost savings.
- Training: Teaching procurement teams savings monitoring best practices.
How can procurement departments promote savings tracking?
Organisations may encourage savings tracking in procurement departments by:
- Leadership Support: Promoting savings tracking.
- Training and Education: Teaching procurement teams savings tracking methods.
- Performance Recognition: Honouring people or teams that save a lot.
- Data transparency: Informing procurement workers of savings results to increase accountability.
- Continuous Improvement: Promoting procurement process and cost reduction improvement.
