The added value in purchasing: What all constitutes cost savings and how is this measured?
Since the external expenditures of a corporation make up a large part of the costs, purchasing is faced with correspondingly high expectations to achieve cost savings. The financial perspective is assuming a major role and the added value in purchasing is gaining importance, not least because the pertinent systems and tools for the measurement of cost savings are gaining more and more possibilities and significance. Ultimately, the question of what the actual added value in purchasing is, and how this is measured in order to appropriately illustrate the success of the purchasing department and its part in the performance of a company, arises.
What is the added value in purchasing?
This pertains to all the cost savings that contribute monetarily to a corporation’s overall performance. This not only includes the “savings”, or the cost reductions with respect to budgets or the prior period, it also includes so-called
cost avoidance, which the purchasing department aims for by buying goods or services from a supplier at a price lower than the market price or lower than the best offer price. In addition, the value added in purchasing includes the increase in liquidity that is achieved through extending payment terms, which in turn has a positive impact on the working capital.
The right methods of measurement lead to success
Discrepancies between the financial and the purchasing department regarding the definition of the added value, and the key figures used to measure these, are a frequent occurrence and therefore need to be clearly regulated or modulated. Only by means of a consistent approach, which is closely interconnected with the procurement process, can substantial analyses be carried out, clear statements can be made and the actual added value in purchasing can be measured.
A clear definition of the savings scenarios and their impact on the overall financial performance is necessary for successful procurement performance management, as are clearly defined roles and responsibilities in the financial and purchasing departments in order to guarantee a binding and sustainable measurement of performance.
Transparency concerning the purchasing data must be guaranteed, particularly in regards to the realization of cost savings. This is often not the case with decentralized and heterogeneous data sources (ERP systems) to begin with. Data processing and data analyzing plays a central role in the course of this, a task for which Excel is still being used in many purchasing departments and which leads to errors and inconsistencies. Systems that, in addition to data transparency and the provision of analysis tools, also offer the option to manage procurement initiatives are a trend. This way, action and savings planning, especially in decentralized organizations, can be implemented very efficiently and makes a plan-actual comparison possible based on defined degrees of hardness or degrees of implementation.
Professional procurement performance management and procurement analytics
With SpendControl by Orpheus, you not only attain transparency over all procurement data, even in a heterogeneous ERP infrastructure, you also obtain the possibility of quickly and efficiently recognizing and uncovering cost savings potentials through a variety of analyses.
With the InitiativenTracker provisions can be planned and the realized success can be measured, thereby making the influenceable procurement performance visible and the added value in purchasing reportable.
Through a myriad of additional analysis options and consultancy services, Orpheus assists corporations with realizing existing cost savings and optimization potentials in the best possible way.Figure 1: "InitiativeTracker – added value in purchasing"
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.