PurchTips edition #325<\/p>\n<\/div>
Here are three fictitious, but realistic, examples of procurement professionals\u2019 cost savings claims. As you read them, think about the amount of cost savings you\u2019d report in these situations. At the end of this article, I\u2019ll share my analysis of these cost savings claims and how much cost savings I\u2019d claim or approve.<\/p>\n
Cost Savings Claim #1:<\/strong>\u00a0\u201cMy company bought this product twice last year. We paid $500 the first time. We paid $402 the second time. We bought it twice this year for $400 each time. My savings is $200, right?\u201d<\/p>\n Cost Savings Claim #2:<\/strong>\u00a0\u201cMy company never bought this product before. I got three bids: $100, $90, and $80. After negotiating with the low bidder, I got a price of $70. My savings is $30, right?\u201d<\/p>\n Cost Savings Claim #3:<\/strong>\u00a0\u201cMy company bought this product last year for $10,000. The supplier proposed that this year\u2019s price would be $11,000. I negotiated and got the price down to $10,800. My savings is $200, right?\u201d<\/p>\n Now for my analysis\u2026<\/p>\n Analysis of Cost Savings Claim #1:<\/strong>\u00a0Because this product was purchased in the prior fiscal year, I would use the average price paid in that fiscal year as the baseline. The company paid a total of $902 for the two units in the prior fiscal year, so that\u2019s an average price of $451 per unit. For each unit bought this year, you\u2019d subtract the current price from $451. So, at a current price of $400, the savings is $51 per unit. The savings on the two units bought this year, then, would be $102.<\/p>\n Analysis of Cost Savings Claim #2:<\/strong>\u00a0Without having purchased the product in the past, the baseline to be used is the lowest conforming bid prior to negotiation. In this case, that would be $80. The difference between that bid and the price paid of $70 would be $10 and that would be the cost savings\/avoidance\/offset in this case.<\/p>\n Analysis of Cost Savings Claim #3:<\/strong>\u00a0Again, the average price paid in the prior fiscal year was $10,000, so that\u2019s the baseline. If this company bought the product for $10,800 \u2013 regardless of what the supplier quoted \u2013 it would not be a cost savings, but a cost increase of $800. The one exception would be if the product was agreed by senior management and the procurement department to be a volatile commodity. In that case, this buyer may have been able to claim credit for \u201cpartially offsetting the rising price of a volatile commodity\u201d as described in my book,\u00a0The Procurement Game Plan<\/em>.<\/a><\/p>\n<\/div><\/div><\/div><\/div><\/div> Members of the NLPA get great articles just like this by email every month. As a member, you will also get access to:<\/p>\nWant to get more procurement articles by email?<\/h3><\/div>
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