Common problems with Cost Savings Reports
 

 

 

Cost savings is the most common performance measuring yardstick generally used to evaluate efficiency of a purchasing department. Cost savings reports , as such, happen to be extremely important.
However there are serious problems found in many cost savings reports which need to be avoided:.

1) Using An Incorrect Baseline: Cost savings are calculated as the quantity to be purchased multiplied by the difference between the price paid and some higher baseline price. Make sure that your company's executives agree with the baseline you use. Picking a high but not credible baseline (e.g., the highest bid received) may maximize your cost savings calculation but hurt your credibility

with those executives.

2) Using Poor Quantity Estimates : Because the price you pay is lower than the baseline price, your cost savings total grows as you purchase more. You may report a certain cost savings value based on quantity estimates.

 

But what if you only end up buying half of that quantity? That's right - your actual cost savings will be half of your estimated cost

savings. When you estimate your cost savings to executives,they expect the company to realize the cost savings you estimate. If the cost savings realized is less than your estimate, you won't be their favorite employee!

3) Failing To Adjust Budgets : To executives, "cost savings" is synonymous with "profit improvement." When you say that you will save $500,000 this year,

 

 

they expect profits to be that much higher. So let's say that you achieve cost savings of $500,000 for a department within the company. Where does that $500,000 go? Does it free up money that they can spend on other things that they hadn't budgeted for?

If so, then your "cost savings" is not really a "profit improvement." The company is still incurring the same amount of expenses. To truly improve profit, an amount equal to cost savings must be removed from the budget.

Purchasing obviously can't do this alone, but working with senior management in this respect can certainly help executives see the value of intelligent purchasing.

 

 

 

Read below more Articles on Supply Chain Topics......

 

Supply Chain Technology: What's Next?
Supply Chain Management BEST practices : Outsourcing

Supply Chain Management : Multi Stage Dynamics

The Basics of RFID Technology

Common problems with Cost Savings Reports

Dynamic Business environment
Supply Chain Strategies

Benefits of preparedness in Negotiation

Seven Principles of Supply Chain Management
10 necessary Strategies for Supply Chain Management
Inclusive growth by realigning Supply Chain

Your FREE Magazine subscription below. Click and get now

 


 
 
 
 

 

 
 

Check the following links too:

 

    

| Sitemap | Copyright | Disclaimer | Privacy Policy | About us | Link with us | Contact us | Advertise |
 

       


|
Click here to Bookmark this site | Contact here for Business collaborations |
 

No part of this web site may be reproduced or transmitted in any form by any means graphic, electronic, or mechanical without permission in writing from the publisher