When is a saving a saving?
Anthony Gluyas, a supply chain senior consultant at Capgemini, provides a response to a reader who questions how other firms deal with a certain issue regarding saving on a reduction in the cost of a vital component.
6 July 2006
Publication
Question: My team recently negotiated a 40 per cent reduction in the cost of a vital component. This makes a huge difference to the cost of the finished article, but is being classed as cost avoidance rather than a saving because we weren’t already buying at the higher price. How do other firms deal with this issue?
Answer: Anthony Gluyas, supply chain senior consultant at Capgemini, writes: This demonstrates a typical scenario where organisations may not have a structured benefits recording process agreed between procurement and finance.
In our experience in both the private and public sector, some organisations will recognise your situation as a saving and some will not. For example, a supplier to a manufacturing company requested a price increase, which the manufacturing company reduced to a rise of 27 per cent through negotiation. Procurement was not allowed to claim this as a saving, as the expectation was that savings were generated on a clear reduction of existing pricing. In another example, a public-sector client faced with a similar situation reduced the anticipated increase by 31 per cent and was allowed to claim this as a saving.
Clarity is vital so you need to agree with finance and senior management what the specific expectations of procurement are. Also approach your industry association or the Office of Government Commerce for guidance on acceptable definitions of savings. Consider the financial implications if your team had not negotiated this reduction. Would your organisation have exceeded the budget allocation? If your actions directly resulted in being able to come in under budget, then seek a compromise with finance so your team can claim credit for its actions. Beating the budget can create additional investment opportunities or be used to offset other negotiations that may not result in your favour.
Whatever the outcome of these discussions, use this negotiated pricing as a baseline. Plan your annual negotiation on this component in advance so that a legitimate saving can be claimed next time. Remember that a key element of procurement is demonstrating how, by how much and who added the value to an organisation by contributing to its overall objectives. Continue to add demonstrable value and record all benefits and savings that your team will have contributed to.
The end result will include progressing towards your targets and greater recognition of your efforts. This has a powerful effect as it increases the strategic importance of your team’s functional role in operations. Start by taking 30 minutes to write down all the savings and benefits your team has achieved within the last six months and then spend an hour reviewing this with finance.
