The procurement profession lacks universally-accepted standards that define what savings are. As a result, some procurement departments have very rigid qualifications for savings while others consider many questionable methods to be valid savings definitions. This article is geared towards developing a savings strategy that is embraced by executive management. Recommendations for defining your savings reports in a manner that CFOs and CEOs will generally consider valid.<\/p>\n
Information about each savings type will be broken down into four sections:<\/strong><\/p>\n Your company pays a lower price this year for a product or service than it has paid in the past for the identical product or service. Year-Over-Year Savings, sometimes called \u201chard savings,\u201d can be achieved using the same supplier as before or a different supplier.<\/p>\n Year-Over-Year Savings = <\/em><\/strong>(OP \u2013 NP) x QP<\/em><\/p>\n Where,<\/p>\n OP = <\/strong>Old price<\/p>\n NP = <\/strong>New price<\/p>\n QP = <\/strong>Quantity procured<\/p>\n For example, if you procured 10,000 ten-packs of Sharpie markers for $0.50 each this year and spent $0.60 on the same markers last year, your Year-Over-Year Savings would be calculated as follows:<\/p>\n Year-Over-Year Savings = ($0.60 \u2013 $0.50) x 10,000 = $1,000<\/em><\/strong><\/p>\n Your company receives more favorable payment terms for products or services purchased this year than it has received in the past for identical products or services or from the same supplier. Note that when your company must pay earlier to receive a discount, your company\u2019s \u201ccost of money\u201d must be factored into the calculation.<\/p>\n Payment Term Savings =<\/em><\/strong> {(ND \u2013 OD) \u2013 [(ON \u2013 NN) x (CM\/365)]} x SP<\/em><\/p>\n Where,<\/p>\n ND = <\/strong>New discount where percentages are written as numbers with two decimal places (e.g. 2% = 0.02)<\/p>\n OD = <\/strong>Old discount where percentages are written as numbers with two decimal places (e.g. 2% = 0.02)<\/p>\n ON = <\/strong>Old number of days in which payment is due<\/p>\n NN = <\/strong>New number of days in which payment is due<\/p>\n CM = <\/strong>Annual cost of money (i.e. the interest rate or other rate of return earned by your company through investing idle cash). This value can be best estimated by your Finance department.<\/p>\n SP = <\/strong>Spending on the products and\/or services to which the new discount applies.<\/p>\n For example, if you spend $10,000 with a supplier who has changed your payment terms from Net 30 to 2%\/10, Net 30 and your annual cost of money is 6%, your Payment Term Savings would be calculated as follows:<\/p>\n Payment Term Savings = {(0.02 \u2013 0.00) \u2013 [(30 \u2013 10) x (0.06\/365)]} x $10,000 = $167.12<\/em><\/strong><\/p>\n Your company pays a lower price this year for a new product or service than it has paid in the past for an old product or service that served the same purpose. Note: If there is degradation or improvement in quality as a result of the substitution, you must adjust the savings such that it reflects any costs or avoided costs as a result of the change in quality.<\/p>\n Substitution Savings = <\/strong>(OP \u2013 NP) x QP,<\/em><\/p>\n Where,<\/p>\n OP = <\/strong>Price for old product or service<\/p>\n NP<\/strong> =<\/strong> Price for new product or service<\/p>\n QP = <\/strong>Quantity of new product or service purchased<\/p>\n NLPA Learning<\/a>:<\/strong> 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<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":" The procurement profession lacks universally-accepted standards that define what savings […]<\/p>\n","protected":false},"author":12,"featured_media":10199,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-10194","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-procurement"],"yoast_head":"\n\n
Scenario 1: Year-Over-Year Savings<\/h3>\n
Scenario 2:\u00a0Payment Term Savings<\/h3>\n
Scenario 3: Substitution Savings<\/h3>\n