How do you Define Savings in Procurement?
Want to get a room full of people disagreeing with one another in as little time as possible?
Then ask them all how they define savings in procurement.
The Great Procurement Debate
Procurement is the acquisition of products and/or services from an external source.
But what are procurement savings?
I remember looking at a LinkedIn forum recently where various professionals shared their definitions of what a procurement saving actually was. While there were some common themes, there were still 250+ different definitions of what constituted a procurement saving.
Clearly, then, this is a topic that requires further examination.
The Question of Cost
Often, procurement savings are defined purely in terms of cost. While cost savings are certainly a form of procurement savings, it’s important not to overemphasise cost savings at the expense of other things.
For example, an overemphasis on cost savings may lead to purchasing items of reduced quality. In such a circumstance, while you may have saved on cost, you’ve also purchased an inferior product. As well as being a questionable definition of a “saving” (surely “savings” is only an accurate term when the product is the same), this could have many negative ramifications for your organisation. These ramifications may even “wipe out” the value of your savings.
Short-term vs Long-term Costs
Another problem with an overemphasis on cost savings is that this measure tends to only look at short-term costs, rather than “whole of life” costs.
For example, buying cheaper computer monitors may result in a short-term saving. But if they need to be replaced much earlier than their more expensive counterparts, is this truly a saving in the long term?
Surely, procurement cost savings cannot be seen only in the short-term, but must also be seen in the bigger picture and/or long term.
Cost vs Value
Another point to consider is the question of the difference between cost and value.
The price of an item should be viewed both in terms of the cost you pay, and the outcome you’re achieving – not simply the cost of the individual item.
For example, why do you procure paper? It’s not because you want paper. It’s because you need to communicate with others, and using paper is one way to achieve this. When you look at procurement from the perspective of the outcome – in this case, allowing communication – you can begin to consider other methods for achieving this. These may cost more in the short-term, but less in the long-term. A good example is if you chose to procure iPads for staff, or an eDocument management system, which allows you to better satisfy the end outcome of communication.
The Procurement “Four Factors”
Ultimately, any procurement must balance up four factors to achieve a desired outcome – including achieving procurement savings. These four factors are: price, quality, quantity, and timelines.
A procurement cost saving is only truly a saving when it is achieved by paying a reduced price for a product or service, without reducing or otherwise negatively impacting on the quality, quantity, or timeline.
If a lesser product or service is still fit for purpose and will deliver the desired outcome, then a reduction in quality, quantity, or longevity that leads to a reduction in costs also represents a true cost saving.
But if not, you haven’t actually achieved a saving – you’ve simply purchased a lesser product or service for a lesser price.
Clearly, true procurement savings cannot be defined simplistically in terms of basic costs.
True cost savings in procurement represent a reduction in cost while achieving the same quality, quantity, and timelines as a comparison situation.
How do you define savings in procurement? Do you agree or disagree with my definition? Why? Share your answer in the comments.
Who is Adam Stennett?
An experienced management consultant and shared services specialist, Adam has spent a lot of time consulting with organisations of various shapes and services on all aspects of procurement. If you’d like to learn how he can help your organisation, send him a LinkedIn message today.