{"id":3288,"date":"2014-04-22T17:47:00","date_gmt":"2014-04-22T17:47:00","guid":{"rendered":"https:\/\/www.certitrek.com\/nlpa\/2014\/04\/22\/tricky-cost-savings-calculation-example\/"},"modified":"2023-06-05T06:44:24","modified_gmt":"2023-06-05T10:44:24","slug":"tricky-cost-savings-calculation-example","status":"publish","type":"post","link":"https:\/\/www.certitrek.com\/nlpa\/blog\/tricky-cost-savings-calculation-example\/","title":{"rendered":"Tricky Cost Savings Calculation Example"},"content":{"rendered":"<p>I hope that you have enjoyed the article, \u201cTricky Cost Savings Calculations.\u201d<\/p>\n<p>Don\u2019t miss updates on Procurement &amp; Supply Chain, Subscribe here!<\/p>\n<p>In the article, I walked you through four calculations that you may use in situations where calculating cost savings is not cut-and-dried.\u00a0 I\u2019d like to take this opportunity to walk you through an example.<\/p>\n<p>Let\u2019s say that your price for an item was $100 on January 1 of last year.\u00a0 You bought 300 units at that price until the price changed to $90 on October 1 of last year.\u00a0 You bought 100 more units at that price last year and 100 more units in the first quarter of this year.\u00a0 Then, for the rest of this year, you bought 300 units at $85.<\/p>\n<p>What is your cost savings for this year?<\/p>\n<p>Some procurement professionals, in an effort to boost their cost savings numbers, would say that each unit they bought for $90 would produce a savings of $10 and each unit they bought for $85 would produce a savings of $15.\u00a0 That would result in a cost savings of $5,500.<\/p>\n<p>That\u2019s not correct!<\/p>\n<p>The correct cost savings is $3,600.<\/p>\n<p>\u201cWhaaaat?,\u201d you ask.\u00a0 Let me explain\u2026<\/p>\n<p>The issue with the calculation of $5,500 in cost savings is that the highest price from last year should not be your baseline.<\/p>\n<p>So, what should be the baseline?\u00a0 $90?<\/p>\n<p>Nope, not that either.<\/p>\n<p>Walking through the calculations from the article\u2026<\/p>\n<p><b>Calculation A:<\/b> Last Year\u2019s Average Price = Total Spent Last Year \/ Number of Units Purchased Last Year<\/p>\n<p>Last Year\u2019s Average Price = ((300 x $100)\u00a0+ (100 x $90)) \/ (300 + 100)<br \/>\nLast Year\u2019s Average Price = ($30,000 + $9,000) \/ 400<br \/>\nLast Year\u2019s Average Price = $39,000 \/ 400<br \/>\nLast Year\u2019s Average Price = $97.50<\/p>\n<p><b>Calculation B:<\/b> This Year\u2019s Average Price = Total Spent This Year \/ Number of Units Purchased This Year<\/p>\n<p>This Year\u2019s Average Price = ((100 x $90) + (300 x $85)) \/ (100 + 300)<br \/>\nThis Year\u2019s Average Price = ($9,000\u00a0+ $25,500) \/ 400<br \/>\nThis Year\u2019s Average Price = $34,500 \/ 400<br \/>\nThis Year\u2019s Average Price = $88.50<\/p>\n<p><b>Calculation C:<\/b> This Year\u2019s Cost Savings = (Last Year\u2019s Average Price \u2013 This Year\u2019s Average Price) x Number of Units Purchased This Year<\/p>\n<p>This Year\u2019s Cost Savings = ($97.50 \u2013 $88.50) x 400<br \/>\nThis Year\u2019s Cost Savings = $9.00 x 400<br \/>\nThis Year\u2019s Cost Savings = $3,600<\/p>\n<p>So, each unit purchased will contribute to cost savings by the difference between the price paid and a baseline price of $97.50.<\/p>\n<p>Got it?<\/p>\n<p>Good!<\/p>\n<p><strong>Recommended Reading<\/strong><\/p>\n<p><a class=\"row-title\" href=\"https:\/\/www.certitrek.com\/nlpa\/blog\/the-most-common-stupid-and-avoidable\/\" aria-label=\"\u201cThe Most Common, Stupid, and AVOIDABLE Excuse For Procurement Ethics Violations\u201d (Edit)\">The Most Common, Stupid, and AVOIDABLE Excuse For Procurement Ethics Violations<\/a><\/p>\n<p><a class=\"row-title\" href=\"https:\/\/www.certitrek.com\/nlpa\/blog\/negotiating-non-disclosure-agreement-nda\/\" aria-label=\"\u201cNegotiating The Non-Disclosure Agreement (NDA)\u201d (Edit)\">Negotiating The Non-Disclosure Agreement (NDA)<\/a><\/p>\n<p><a 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Shocking<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>I hope that you have enjoyed the article, \u201cTricky Cost [&hellip;]<\/p>\n","protected":false},"author":12,"featured_media":4003,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-3288","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-procurement"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v19.4 (Yoast SEO v19.13) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Tricky Cost Savings Calculation Example - Next Level Purchasing Association (NLPA)<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.certitrek.com\/nlpa\/blog\/tricky-cost-savings-calculation-example\/\" \/>\n<meta property=\"og:locale\" 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