How much did you really save? Part 2

My previous post looked at measuring procurement performance against annualised savings, as advocated by Steve Mallaband in a recent CPO Agenda article.

But actual savings are still important.

I had a few beers after work the other day. Enough beers that I felt the need to have a Burger King at the station on the the way back. And I was even inebriated enough to read the receipt, you know the way people in bars will sometimes read what’s written on a beer mat. And this is what I read :

Whopper Rg                  4.49
Coke Pmix 16oz
Fries Regular

TAKE AWAY                   3.83
VAT                               0.66
Amount  Due                 £4.49

CASH PRE-KEYED          £4.49
Change                         £0.00

Meal Deal Saving £1.60

Apparently I am saving money by making this purchase from BK.

There’s a difference between annualised and actual savings. The annualised saving here is over 35%. But obviously I know that buying burgers, fries and coke is not saving me money. There are no actual savings there. Similarly, in the real world, there are plenty of stories of people mixing up annualised and actual savings.

For example, suppose you run a reverse auction for consultancy services and save 20% on day rates. Yet changes in your organisation mean a far greater reliance on consultants compared to employees. So your overall spend on consultants doubles. Your annualised savings look good and have helped you hit your targets. But from a big picture perspective the company is spending more than ever on consultants!

The good news is that there are ways buyers can impact actual savings as well, and not just by implementing a state of the art e-procurement system. See this post on Supply Excellence:

http://supplyexcellence.com/blog/2007/11/16/cpo-summit-procurement-and-global-travel/

[E]ven with your top negotiator on the phone with travel companies, Merck realized a 15% savings by just having travelers book 14-days in advance of their trip. Procurement not necessarily needed but strict policy enforcement is. Merck runs reports to highlight those not complying with the 14-day advance policy; the team adds up the total cost and shows management. Sure, $25 here and there doesn’t particularly matter but if all 10,000 travel employees are incurring that extra cost it equals an unnecessary $250,000 spent. Now, that’s something management may want to see.

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