Viewing entries tagged
procurement savings measurement

How Easy Can Implementation Be?

As well as reducing pricing dramatically, the rise of stand-alone, best-of-breed tools to strengthen procurement processes and improve efficiency has brought another key benefit - easy implementation.

Whenever we’re talking to potential customers, one question we’re always asked is “How easy / quick is it to implement?”. The answer is: “It’s very easy (you don’t need any involvement from IT on your end), and it’s very quick (you can be up and running in a fully configured environment in as little as one day)”. This is still a surprising answer to some, but it’s becoming increasingly normal for this kind of technology. Gone are the days of lengthy, complex and costly projects just to get the thing off the ground.

To give a real-life example, recently we were contacted on a Monday evening by an organisation who were looking for a more robust and efficient way of managing and reporting their savings than their current spreadsheet-based process. On the Tuesday we provided a demo of our system via a web meeting. On the Wednesday we discussed the data we needed to build and configure a tailored environment for them (their category taxonomy, organisation structure, savings types, approval rules etc). On the Friday we received their data, built and configured their environment, and provided access to their super-users to check everything out.

During the week after we conducted web-based training sessions for all their users and they were up and running in the Tracker, having taken a huge step forward from their spreadsheet process in just a handful of days.

So just because something falls into the ‘technology’ bracket, doesn’t mean it needs to be complicated to buy and implement. If you’d like to understand how our Tracker can help your procurement team manage its cost reduction activity in a more efficient way – just get in touch and arrange a demo. If you like what you see, you could be using it this time next week!

10 Golden Rules for Measuring Procurement Savings

Measuring procurement savings. Don’t you just love it? How many hours are spent by organisations every year discussing / arguing about what constitutes a saving? Procurement may have one view, finance may have another, the budget holders may hold a different opinion, and the consultants you hired to run a cost reduction programme probably have a completely different number entirely.

I’m not going to get into the debate of whether spending less but at a higher price is a saving (“we managed demand”), or spending more but at a lower price is a saving (“we reduced the cost-per price”), but here are my 10 rules of good practice for savings measurement.

1. Clearly define your savings types and how they are measured.

Key factors here are what’s permissible as a baseline, especially if there isn’t an obvious last-price-paid, how fluctuating markets are catered for, if at all, how first-time or one-time purchases are measured, and how you handle one-off payments like signing bonuses or volume rebates. There’s often no absolute right and wrong, although there is common sense and also good accounting practice.

2. Be completely aligned with Finance.

This really goes without saying, but if Procurement is to have any credibility in the business when it comes to declaring savings numbers, the CFO needs to at least be in agreement that the savings definitions and measurement methodology are sound.

3. Reward innovation.

It makes me sad when I talk to companies who think measuring Purchase Price Variance is everything there is to measuring savings. Procurement has evolved far beyond simple price reduction and is now much more focused on adding wider value to the business. With this in mind, make sure that the kind of value that can be derived from lateral thinking is measured. What if we don’t buy this thing at all because we can do things completely differently, or what if we actually pay more but we get all this great additional service that really helps our efficiency?

4. Look at the total cost.

Following on from rule 3, remember piece price alone is not everything. Make sure delivery, payment terms, supplier management, one-off costs, life-cycle costs etc. (as far as reasonable) are taken into account when calculating savings.

5. Understand your cost of capital.

$10,000 now is not the same as $10,000 in 12 months’ time. Make sure you know the value of a signing bonus compared to a retrospective rebate, and how much lower a price on 15 day payment terms needs to be to provide better value than a price at 90 days. Knowing the value of your cash will also help of course in negotiations.

6. Don’t stop tracking savings at point of contract. Measure what actually happened.

It’s a well-documented fact that up to 40% of savings go missing somewhere between the point of contract and the savings actually materializing. Some form of post-contract monitoring, real-time or retrospective adjustment is key to ensuring a decent level of accuracy.

7. Be accurate, but don’t seek perfection.

As a balance to rule 6, don’t be tempted to take things too far. It can be easy to want to take savings accuracy to the nth degree. This might be possible in some instances, depending on technology and particularly on direct materials, but in many cases it’s simply not realistic to be 100% accurate across the board. Make a judgement call on effort vs return. With a robust process and the right tools, the high 90%s should be easily achievable.

8. Don’t forget the increases.

We all love declaring our cost reductions, but how many of us like to admit our increases? It’s a fact of life that these sometimes happen and we can’t completely avoid them no matter how careful we are. If we forget to include these and measure them we only see a distorted picture.

9. Have a clear governance process.

Ensure that savings are approved. The level and type of approval may vary depending on spend, criticality etc., but it’s important that the savings rationale and calculation method are ratified and agreed, to help standardisation and provide credibility.

10. Remember it’s a means to an end.

The final rule is to keep the big picture in mind. Savings in isolation don’t mean a whole lot, in fact they could be bad for the business if reduced spend in certain areas is stifling productivity. It’s what those savings bring the business in terms of value that’s important, whether it’s profit or the ability to spend more to fund growth. It’s important to keep this in focus.

How to measure one-off savings

Are one-off savings real savings? What effort should be applied to obtaining one-off savings? How should they be reported? Many companies struggle with these questions.

A few years ago I worked for a procurement outsource provider managing indirect spend categories for a large FMCG company. Naturally, although we had a wide range of performance metrics, the vast majority of the focus was on delivering savings, to deliver a direct return on their investment.

One golden rule for claiming savings was that we could only claim sustainable savings. One-off savings didn’t count. By sustainable, I mean the reduced cost could be maintained year after year.

This rule brought a number of implications. Firstly, it meant savings on capital spend were virtually impossible. Secondly, we had no incentive to chase one-off rebates or temporary savings, focusing instead purely on sustainable savings.

So is this right? Should procurement ignore one-off savings? Perhaps in some environments it makes sense, but of course they still have some value, they just need to be treated differently to sustainable savings. There are different ways of doing this – here are two.

One is to report the two types of savings completely separately with separate targets. Procurement should still be motivated to go after the one off savings, particularly if large portions of spend are non-repeat, making sustainable savings impossible. The short term value is the same, and if one-off savings are achieved every year, they become sustaining, albeit you have to repeat every year to keep them.

The second way is to look at a one-off saving as a cash injection into the business. You can’t reduce future budgets based on these savings, but you do have more cash. Therefore, putting a figure on that cash in the form of a cost-of-capital saving is an accurate way of normalising to the sustainable savings. So a £1m one-off saving at 10% COC would equate to £100k in sustainable savings.

Whatever the numbers are, it’s key that your measurement is aligned with your Finance colleagues’ accounting principles so whatever the numbers are, they are reported in a way that provides credibility and breeds confidence.

You get what you measure

You’ve probably heard the saying “you get what you measure” and this is certainly often the case with procurement. When KPIs are set at an individual or team level they are designed to shape the focus of that particular individual or team. Procurement KPIs may be multi-faceted and include “soft” objectives which are measured subjectively. The most commonly occurring ones however are the objective, number-driven KPIs, quality focused such as parts-per-million targets, consolidation focused supplier reduction targets, or the most common of all – savings targets.

Measuring savings is no simple task and behaviour will be altered depending on the nuances of the measurement. For example I worked at one company where no carry-over from one calendar year to the next was allowed, so savings starting in December only achieved one twelfth of the value of an equivalent saving starting in January. This is of course tempted buyers into delaying savings implementation until the new year in order to maximise the recorded benefit.

How rebates and signing bonuses are measured can also affect behaviour. If every rebate received can be “banked” as a saving, then there are likely to be more rebate-based deals where savings can theoretically be banked every year, than straightforward price reduction were the benefit may only be claimed once.

The key for any business is to understand the behaviour it wants to encourage, then set the savings measurement rules and KPIs accordingly. Is a price reduction better than an equivalent rebate for the business? Is an extension of payment terms from 30 to 60 days better than a 2% price cut? Would just buying less of something (e.g. travel) be better than reducing the price so people can buy more for the same total cost? Once a business can answer these questions, setting its goals appropriately will encourage the procurement team to deliver real benefit.