Tricky Cost Savings Calculations<\/h1><\/div><\/div><\/div>Are Your Cost Savings Calculations Defensible?<\/h2><\/div><\/div><\/div>If you repeatedly purchased an item, the price of that item went down on January 1 of every year, and you bought the same quantity every year, calculating your cost savings for that item would be easy. But for items for which pricing changes less predictably and quantities vary from year to year, calculating cost savings can be trickier. In this edition of PurchTips, I will share formulas for calculating cost savings for items whose prices and purchased quantities are more volatile.<\/p>\n
The first thing you have to do when calculating cost savings for an item that fits into this category is to calculate Last Year’s Average Price for each item, which is done with Calculation A. In all calculations, “year” refers to the fiscal year.<\/p>\n
Calculation A:<\/strong>\u00a0Last Year’s Average Price = Total Spent Last Year \/ Number of Units Purchased Last Year<\/p>\nThen, you should calculate This Year’s Average Price for the item using Calculation B.<\/p>\n
Calculation B:<\/strong>\u00a0This Year’s Average Price = Total Spent This Year \/ Number of Units Purchased This Year<\/p>\nYou can now calculate This Year’s Cost Savings for the item using Calculation C.<\/p>\n
Calculation C:<\/strong>\u00a0This Year’s Cost Savings = (Last Year’s Average Price – This Year’s Average Price) \u00d7 Number of Units Purchased This Year<\/p>\nSome procurement professionals like to keep a running tally of cost savings with each purchase order. To do that for a particular item, you can use Calculation D.<\/p>\n
Calculation D:<\/strong>\u00a0This Order’s Cost Savings = (Last Year’s Average Price – Price Paid on This Order) \u00d7 Quantity Purchased<\/p>\nThen, add up the cost savings for each order to arrive at a total for the year. One caveat of using the order-by-order approach: You must include in your tally all orders \u2013 even those where you paid more than last year’s average price – for your total to match the total from Calculation C. Otherwise, it will not match and your savings claims can be legitimately disputed.<\/p>\n
Recommended Resource:<\/b><\/p>\n\n- Cost Savings Spreadsheet<\/a><\/li>\n<\/ul>\n
Recommended Resource:<\/b><\/p>\n\n- Best Cost Reduction and Performance Management Strategies<\/a><\/li>\n<\/ul>\n
NLPA Learning<\/b><\/a><\/span>:<\/b> Looking for authoritative procurement templates, tools, webinars, and more? Stop trying to create resources from scratch and start taking advantage of having exactly what you need right at your fingertips in NLPA Learning<\/span><\/a>.<\/span><\/p>\n<\/div><\/div><\/div><\/div><\/div>Do You Want a More Rewarding Procurement Career?<\/h5><\/div>![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/spsm_verify.jpg\" "\\"spsm_verify\\"")
<\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Download<\/span><\/a><\/div><\/div><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div>![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/services.jpg\" "\\"services\\"")
<\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
Are Your Cost Savings Calculations Defensible?<\/h2><\/div><\/div><\/div>If you repeatedly purchased an item, the price of that item went down on January 1 of every year, and you bought the same quantity every year, calculating your cost savings for that item would be easy. But for items for which pricing changes less predictably and quantities vary from year to year, calculating cost savings can be trickier. In this edition of PurchTips, I will share formulas for calculating cost savings for items whose prices and purchased quantities are more volatile.<\/p>\n
The first thing you have to do when calculating cost savings for an item that fits into this category is to calculate Last Year’s Average Price for each item, which is done with Calculation A. In all calculations, “year” refers to the fiscal year.<\/p>\n
Calculation A:<\/strong>\u00a0Last Year’s Average Price = Total Spent Last Year \/ Number of Units Purchased Last Year<\/p>\nThen, you should calculate This Year’s Average Price for the item using Calculation B.<\/p>\n
Calculation B:<\/strong>\u00a0This Year’s Average Price = Total Spent This Year \/ Number of Units Purchased This Year<\/p>\nYou can now calculate This Year’s Cost Savings for the item using Calculation C.<\/p>\n
Calculation C:<\/strong>\u00a0This Year’s Cost Savings = (Last Year’s Average Price – This Year’s Average Price) \u00d7 Number of Units Purchased This Year<\/p>\nSome procurement professionals like to keep a running tally of cost savings with each purchase order. To do that for a particular item, you can use Calculation D.<\/p>\n
Calculation D:<\/strong>\u00a0This Order’s Cost Savings = (Last Year’s Average Price – Price Paid on This Order) \u00d7 Quantity Purchased<\/p>\nThen, add up the cost savings for each order to arrive at a total for the year. One caveat of using the order-by-order approach: You must include in your tally all orders \u2013 even those where you paid more than last year’s average price – for your total to match the total from Calculation C. Otherwise, it will not match and your savings claims can be legitimately disputed.<\/p>\n
Recommended Resource:<\/b><\/p>\n\n- Cost Savings Spreadsheet<\/a><\/li>\n<\/ul>\n
Recommended Resource:<\/b><\/p>\n\n- Best Cost Reduction and Performance Management Strategies<\/a><\/li>\n<\/ul>\n
NLPA Learning<\/b><\/a><\/span>:<\/b> Looking for authoritative procurement templates, tools, webinars, and more? Stop trying to create resources from scratch and start taking advantage of having exactly what you need right at your fingertips in NLPA Learning<\/span><\/a>.<\/span><\/p>\n<\/div><\/div><\/div><\/div><\/div>Do You Want a More Rewarding Procurement Career?<\/h5><\/div><\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Download<\/span><\/a><\/div><\/div><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div><\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
If you repeatedly purchased an item, the price of that item went down on January 1 of every year, and you bought the same quantity every year, calculating your cost savings for that item would be easy. But for items for which pricing changes less predictably and quantities vary from year to year, calculating cost savings can be trickier. In this edition of PurchTips, I will share formulas for calculating cost savings for items whose prices and purchased quantities are more volatile.<\/p>\n
The first thing you have to do when calculating cost savings for an item that fits into this category is to calculate Last Year’s Average Price for each item, which is done with Calculation A. In all calculations, “year” refers to the fiscal year.<\/p>\n
Calculation A:<\/strong>\u00a0Last Year’s Average Price = Total Spent Last Year \/ Number of Units Purchased Last Year<\/p>\n Then, you should calculate This Year’s Average Price for the item using Calculation B.<\/p>\n Calculation B:<\/strong>\u00a0This Year’s Average Price = Total Spent This Year \/ Number of Units Purchased This Year<\/p>\n You can now calculate This Year’s Cost Savings for the item using Calculation C.<\/p>\n Calculation C:<\/strong>\u00a0This Year’s Cost Savings = (Last Year’s Average Price – This Year’s Average Price) \u00d7 Number of Units Purchased This Year<\/p>\n Some procurement professionals like to keep a running tally of cost savings with each purchase order. To do that for a particular item, you can use Calculation D.<\/p>\n Calculation D:<\/strong>\u00a0This Order’s Cost Savings = (Last Year’s Average Price – Price Paid on This Order) \u00d7 Quantity Purchased<\/p>\n Then, add up the cost savings for each order to arrive at a total for the year. One caveat of using the order-by-order approach: You must include in your tally all orders \u2013 even those where you paid more than last year’s average price – for your total to match the total from Calculation C. Otherwise, it will not match and your savings claims can be legitimately disputed.<\/p>\n Recommended Resource:<\/b><\/p>\n Recommended Resource:<\/b><\/p>\n NLPA Learning<\/b><\/a><\/span>:<\/b> Looking for authoritative procurement templates, tools, webinars, and more? Stop trying to create resources from scratch and start taking advantage of having exactly what you need right at your fingertips in NLPA Learning<\/span><\/a>.<\/span><\/p>\n<\/div><\/div><\/div><\/div><\/div> Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div> Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>\n
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Do You Want a More Rewarding Procurement Career?<\/h5><\/div>
<\/span><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div>
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![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/services-contracting.jpg\" "\\"services-contracting\\"")
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