The 6 Savings Types
Procurement answers for a large cost block, especially in manufacturing companies or in trade enterprises. This cost block should be managed. Savings should be achieved and performance should be verifiable. In this article, we will present you with a fundamental system…
There are many ways to achieve savings
We distinguish between 6 savings types
They are defined as price or cost changes relative to a previous period. The baseline for the calculation of these key indicators can be, for example, a price average from the previous year. This is compared to the current price and measures the difference with the current invoice or order quantities. The key figures calculated in this manner are also call material price variance (MPV) or material price variance (MPV) or material cost variance (MCV)
Savings with regard to the Budget (Budget Savings)
These can also be shown as savings. Decisive for this range of key figures is the question as to what can or may be considered as a „Budget“.
A budget can be a planning specification for procurement costs of purchasing per category derived from the profit and loss statement or a real (actual) value from a previous period for individual procurement categories.
In a detailed budget plan, prices can also be planned as quantities, which then provide the budgeted procurement volume.
Budget Savings are the difference between the actual realized order or invoice volumes and the planned budget.This method of measurement can be used for any planning objects, such as procurement categories, investment projects, suppliers, materials, costs centers, etc. If pricing and quantities are budgeted separately, the actual price effects can additionally be separated from the effects of quantity.
They are, for example, the result of specification changes of external procurement materials.
Example: Expensive titanium sheet metal can potentially be substituted by cost-effective steel sheet metal. The pricing changes from such design changes can also be calculated and shown as savings.
These are savings in the sense of cost avoidance. In this case, we try, for example, to use competitive and decision-making pressure in a target manner through RFPs and systematic, structured negotiations.
These fall under the category of “cost avoidance” as well. They describe external market developments, which influence the cost price for materials and services, though procurement cannot actually be made responsible for this.
These savings can be a combination of multiple savings types.
For example, a combination of negotiation success (cost avoidance) and the material price variances (cost reduction) to actually be measured (later) based on actual data (pricing and quantities from orders and invoicing).
Example: A new Chinese supplier for an existing raw material
Negotiation success initially emerges within the scope of contractual negotiations. The actual savings in contrast are measured using historic savings (material price variances), e.g. with respect to the same parts/materials of other suppliers. In this many, e.g. the following question can be answered, “How great are the savings using the new Chinese supplier relative to the previously used supplier sources?”
In reality:The precise calculation of ratio success is tied to many problems. For instance, in the aforementioned example, it is problematic to add negotiation success to cost reductions in the sense of cost avoidance as both savings technically have to be separated. The first case involves savings not in terms of profit, whereas material price savings represent savings in terms of profit.
Measuring procurement performance systematically
The following diagram shows all savings types presented in an overview:Savings types that are integrated in the Orpheus software
All savings types presented are integrated in Orpheus software and are available for our clients with only a few clicks. Orpheus creates software for strategic procurement and spend management.
We offer you a holistic solution for increased transparency, potential analyses and measuring your procurement success regarding indirect purchasing with our DataCategorizer, SpendControl and InitiativeTracker modules.
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In this blog you will find expert knowledge about initiative management and project management in strategic procurement. InitiativeTracker is a software for planning and monitoring your sourcing initiatives, controlling your procurement organization and measuring your procurement performance.