It is much buyer to obtain cost savings than it is to measure those savings accurately and report them in believable way. Buyers and purchasing managers often overlook this fact. They then sometimes wonder why they are not appreciated when they have consistently reported large savings. They seldom realize that their reports may not be fully believed because the executive receiving the report questions the premises that the report are based on.
Though there may be doubt of a report’s validity, the executive may be too busy in other areas to delve into the details of the alleged saving. If the buyer has ever exaggerated his or her achievement or used a shaky premise for taking credit for a cost saving, the executive will tend to doubt the accuracy of all reported savings.
It is important to report the results of purchasing activity to be able to justify an adequate staff and to make sure that purchasing personnel are compensated in relation to their contribution. Reports that are poorly prepared or unbelievable, however, do more damage than good.
A proper savings report must be based on predefined criteria. Those criteria should be discussed with your company’s executives so that they agree or so they can revise the definition to suit their standards. Here are some of the things you need to consider when you decide how you will define savings.
How long a period should be used to accumulate savings? The usual period is one year. Determine if the year should be the calendar or the fiscal year.
If the cost of a product or service is lowered and it is repeatedly purchased at the lower cost, how long should the saving within the year it was first obtained. This is unfair if you obtain the savings near the end of the year. It also might be a negative incentive for the buyer. The buyer might postpone efforts to get a supplier to reduce cost until the new year when he will receive a full twelve months of benefit. It seems better to allow credit for twelve months after the date of the initial savings.
Must all savings be related to price? If the buyer pays the same amount for better goods or improved specifications that make the product last twice as long, who determines the value of the saving? If a buyer is not given credit for this type of saving, he might be inclined always to look for lower cost over the long run.
How should cost avoidance be reported? Who will decide on the value and how will it be calculated? If inflation causes the average price of products to go up five percent, but purchased goods only go up three percent, should the buyer get credit for holding the price line? Should this be reported as a saving? Some companies use several categories of savings, one for price changes and one for costs avoidance. Separating the two helps the accounting function forecast profits more accurately.
What is the starting point for measuring cost avoidance? If a previous price actually paid is used, an unrealistic figure will be obtained when the previous purchase was made several years ago. Some companies allow the buyer to use the prices announced by the supplier even though those prices were never actually paid. For example, the supplier may announce an increase of 4%, but then rescind it. The buyer may have been the actual cause for the change. Since there is no way to know for sure, a decision must be made on how this will be interpreted and reported.
Buyers frequently can get price increases postponed and they should be credited with those savings if they can be substantiated by some type of announcement or documentation. For example, let us say you spend USD 5000 per month on a product. The supplier increases the price so that your cost will be 5% more and the new price will take effect in 30 days. Through your efforts and skill in negotiating you are able to get the supplier to postpone the increase for five month (which may be the end of the year). Therefore, you would be credited with four months of savings at USD 250per month or a total USD 1000 in cost avoidance.
As you see, what may have seemed a simple process at the outset, becomes rather complex with many variables to consider. Reported savings are approximate since actual savings are difficult to calculate accurately. Nevertheless, every effort should be made to be as close to the truth as possible. If everyone uses the same definitions within an organization, then the data will be accepted more readily.
Source : Jurnal Professional Purchasing APS Vol.41 (Jul/Aug 2013)
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