Cost Savings - Determining what is and what isn't a cost savings
Looking for any feedback/best practices regarding how your indirect procurement organization defines/reports savings. Specifically, how does your company define and calculate savings that don’t specifically meet the typical standard guidelines or “rules” for cost avoid and realized cost savings. Thank you.
I see you did not get any feedback on this.
I have the exact same dilema.
Is there anything you can share back?
In our organization, we count only year-over-year cost reduction as creditable saving and it goes against our annual saving objective. This is very challenging when there is high inflation. However, it serves very well to the financially conservative corporate culture.
The other area is usage reduction by improving the operation efficiency. For example, re-purposing the software licenses from retired employees to new hires; adjusting mobile voice/data package based on employees' usage; requesting extended consulting services for no additional charges,etc.
Cost avoidance is reported but is not counted toward our achievement, for example, the discount from vendor listed prices, expected outsourcing project implemented by internal resources, etc.
We use "Cost Reduction" as the primary heading and then define cost savings, cost avoidance and productivity improvements. Below are the definitions.
* Savings resulting in a lower price compared to last price paid.
* Savings achieved by a change in materials, specifications, or scope of services resulting in a lower price or overall cost compared to historical price/cost information.
* Can be reported as a one-time savings or multiple years
* A cost reduction, reached through Procurement involvement, resulting in a lower price/cost than an initial proposal
* Avoiding a potential increase in price/cost by implementing a strategy to control, delay, or avoid potential increases with business clients and/or suppliers
Process / Productivity Improvement:
* A savings resulting from a reduction in internal resources, i.e. man/method/machine
Senior Manager Corporate Procurement
We utilize the same definitions that were noted in the 11/30 post and title it Cost Reductions. We tend to exclude savings and/or avoidances that are not concrete and quantifable. We track current year savings to budget and then we also track the annualized savings and avoidance.
Tracking current year savings to budget was the only way to get the CFO onboard!
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