Procurement is responsible for input efficiency within the business, be it services or manufacturing companies. In order to generate procurement savings, costs should be optimized and that can be done in many different ways. This includes:
Savings that are obtained by changes in the cost from the previous year to this year is known as historic savings. They are calculated on the basis of material cost variance and material price variance.
Savings that are generated through the changes made in the specification of external materials is known as technical savings. For example, steel sheet material can be used as the replacement for exclusive titanium sheet. Thus, the cost savings due the changes in design can also be seen as way to optimize costs.
These can be known as the result of the savings achieved from cost avoidance and cost reduction. For example, the collection of material price variances and the negotiation success can be measured later in the context of actual data which mainly is the quantity and pricing from the invoicing and orders.
Index and RFP savings
These are the savings which are done keeping in mind the cost avoidance. For example, applying sound decision making process through structured negotiation and RFPs procedures. Now coming to the index savings; they also fall in category of cost avoidance but these savings basically denote the influence of cost price on services and supplies and the exterior market progress.
The savings that are generated from procurement costs when compared with actual cost from the preceding period is known as budget savings. In simple terms, savings that can be obtained by comparing the difference between the planned budget and the actual order is known as budget savings.
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Author – Aval Sethi, Founder