Comprehensive Guide to Procurement Savings Tracking by Simfoni’s Procurement Professionals
Table of Contents
Every organization, regardless of industry, needs specific items to keep its business operations. These items range from primary products to more complex materials and machinery. Additionally, companies often require a wide range of repairs, training, and other services to maintain the organization. These costs tend to add up, primarily if not appropriately managed.
Procurement savings should be at the top of every business’s agenda. Many organizations find it challenging to determine the most effective method for reporting savings and measuring actual cost savings.
While measuring your procurement performance can be complicated and challenging, successfully implementing the best reporting system is critical in achieving strategic savings.
With the effects of the pandemic still ongoing, it’s imperative that businesses keep track of all strategic sourcing and other cost reduction initiatives to survive harsh economic downturns, a challenging but not impossible task.
If you’re actively looking for a way to keep an eye on your business’s procurement savings, look no further than this guide we’ve put together. We’ve given you the information you’ll need to start using savings tracking in your procurement strategy.
What is Savings Tracking?
We define savings tracking as a strategy that estimates how much cost reduction will be realized if strategic sourcing and other cost-effective tactics are adopted by an organization.
Most procurement teams use “Source-to-Pay” or finance software to configure, manage, and track custom savings. More advanced software allows an organization to track both recognized and unrecognized savings and repayment agreements according to company policies. This provides transparency and accuracy in tracking and reporting savings.
Once the information is available, the stakeholders are able to estimate and judge whether their cost reduction and saving tactics are beneficial.
In most organizations, there are four things that must be done for savings tracking to be successful. These are:
- The business has to try to reduce costs.
- Risk management has to be implemented.
- The introduction of new services and products to gain enough market value.
- Cash flow has to increase.
Successfully implementing savings tracking can only occur if all stakeholders in the organization are involved and work towards achieving this goal.
Cost Savings vs. Cost Avoidance
Before we delve any deeper, we need to ascertain the difference between cost savings and cost avoidance. While they may be related, they are very different concepts in terms of procurement savings tracking, and organizations need to track both to understand the total value delivered by procurement.
According to the Chartered Institute of Procurement and Supply (CIPS):
“Cost avoidance is a reduction in cost resulting in a spend that is lower than would otherwise have been if the cost avoidance exercise had not been undertaken.”
So, for example, let’s assume you’re paying an internet provider for a yearly subscription. The vendor sends you a renewal contract that includes a 10% increase. You use your negotiations skills to avoid the 10% increase by signing a long-term renewal contract. This is cost avoidance.
Cost savings, on the other hand, is more tangible. Essentially, cost-savings refer to money that is saved due to a shift in company policy and reduces the cost of operation. Cost savings are changes that produce profits, and both employers and employees are responsible for planning and implementing them.
The organization is responsible for ensuring that policies are in place so that cost-saving measures are implemented successfully. The employee or procurement team, on the other hand, has the sole responsibility of ensuring that they adhere to the stipulated standards.
So, for example, you could negotiate down the per-unit price of an item so that your sourcing is now cheaper, thus saving you money.
What are the types of cost savings?
Before discussing procurement cost optimization, we need to understand the types of cost savings commonly found in most businesses. These are:
1. Historic Savings
Refer to changes in unit prices as compared to the previous period. Historic savings are calculated based on a baseline of the prior year. So, for example, it could be from a critical indicator like the price average from the year before. Such indicators are then compared with the current price, and the difference is then calculated.
2. Budget Savings
Are derived based on the difference between the actual price (price on the invoice) and the planned budget.
3. Technical savings
Technical savings are a consequence of changes in the technical specification of a product. For example, when a reasonably priced alternative replaces the requirement for an expensive product – the difference in prices, as a result of this change, is known as a technical saving.
4. RFP savings
RFP stands for Request for Proposal, and it is categorized as an ‘avoidance’ kind of saving. Why? Because through the request for proposal from various suppliers, the company can choose a supplier from the submissions received. In most cases, the lowest bidder is the one who is selected.
5. Index savings
These are savings acquired due to external market developments, which usually affect the prices for materials and services.
6. Ratio Savings
These are a combination of savings. So, for instance, it could be a combination of technical and budget savings.
Procurement Savings Tracking
What is Procurement Savings Tracking? In the procurement landscape, the term ‘savings tracking’ refers to a process of monitoring the savings realized through cost reduction and strategic sourcing.
The truth, though, is that there are bound to be multiple savings projects running simultaneously at any given time. This makes tracking and achieving the desired savings target challenging. Having software like Simfoni gives you insight into your spending trends, savings opportunities, and resulting cost realities to maximize procurement savings.
For many organizations, procurement savings are the leading key performance indicator (KPI) for any procurement department. Procurement departments must focus on this primary indicator to show just how well their procurement strategies are working.
Why is Procurement Savings Tracking important?
Procurement savings tracking is essential if a business wants to have the correct data when making decisions. It’s vital to track procurement savings the proper way because it directly bears the company’s bottom line and other factors such as risk mitigation.
A recent survey by Delloit found that more than 79% of Chief Procurement Officers (CPOs) agree that procurement savings tracking is the first thing to perform for a better future of any organization.
Regardless of the organization’s size, industry sector efficiency, and maturity of the procurement strategy, realizing cost savings is an important objective. This is hardly surprising because in most organizations nowadays, at least 50-70% of revenue is spent on procurement operations.
There are several reasons for this, including an increase in the outsourcing tasks that were once performed within the organization. Moreover, procurement has also become responsible for commodities traditionally outside its scope of responsibility, such as business travel, insurances, marketing and communication, and professional services.
So it’s clear that an organization needs to measure the success of procurement strategies to better its overall performance. An efficient procurement system will result in more savings. Furthermore, when you’re able to get savings reporting on a continuous basis, you can quickly steer the direction of your business because you’ll have relevant and valuable information at your fingertips.
Think of savings tracking as an insurance policy that helps you avoid unnecessary expenses on rainy days.
Besides improving profitability, there are other reasons for measuring and reporting procurement savings, such as:
1. Continuous Improvement
When you measure savings, you know exactly where you stand. Having insight into price trends and the extent to which procurement is affected clearly shows the deviations from the planned results. It also makes it easier to implement specific actions that deal with undesired consequences.
2. Demonstrate Added Value
Given how vital procurement is to the profitability of an organization, it is only logical that proving how effective cost control can demonstrate the added value of the procurement function.
3. Improve Credibility
Procurement involves an integration of different disciplines and departments within an organization. It can only be successful when it functions appropriately in all departments and disciplines. Therefore having a good track record in cost savings improves the credibility of procurement and pushes procurement to the forefront of any new initiatives that will lead to new spending
Why Excel or Google Sheets is not a Savings Tracking Tool
You might be thinking, well, we’ve been using Excel and Google Sheets to track procurement savings, and it’s been working just fine for decades. This traditional way of tracking savings was once the holy grail for tracking procurement savings. Still, it’s not an efficient way to go about things, especially now since there are better tools to use.
Undeniably there are a few benefits of using Excel, which include:
- It’s very user-friendly and affordable. So if you’re running a small business, Excel might seem like a better option.
- It allows you to deal with a lot of subjects.
- It’s often one of the standard tools used throughout the whole organization.
- It requires little to low financial investment.
While these benefits might seem justifiable, it’s pretty clear that Excel or Google Sheets have limitations in terms of procurement savings tracking. For example, these tools lack reliability and accuracy of the data, limited collaboration aspects, and so on.
So why should you avoid using Excel as a procurement savings tracking tool?
1. Excel is not reliable
With hundreds of lines and columns of data, it’s pretty easy to make an error that can (and will) be fatal, mainly because it’s a manual process. Furthermore, locating this error can be very challenging with all this volume. Additionally, one mistake is enough to make all the data on your Excel spreadsheet useless.
2. Misinterpretation of data
It’s also relatively easy to misinterpret data because the interface only provides rows of data without further analysis or dashboard. This can make it extremely complicated to interpret data and plan accurately.
3. Updates are a challenge to make
Keeping data updated in an Excel spreadsheet can be a real challenge. Maintaining and synchronizing data in real-time is also time-consuming, especially when there are different versions of the software or when software updates occur.
4. Excel makes collaboration challenging
Following the progress of a project and managing a team on Excel is very difficult. Think about it when has Excel ever been chosen for its collaborative properties?
Excel can hardly be touted as an efficient savings tracking tool. It was not designed to be a collaborative tool that you can use to communicate efficiently between the procurement and finance departments.
There are simply too many disadvantages, from data insecurity, unreliability, and inability to perform as a collaboration tool.
Types of Procurement Savings
In the procurement landscape, there are three areas to look for cost savings. These are:
1. Managing Purchase Demand
Often one of the easiest ways to achieve cost savings is to decrease the demand. This can be done in three ways.
- Reduce consumption: This is as simple as asking, “Do we really need this?”. This question is straightforward but seldom asked. Most organizations purchase goods that they could do without, especially in economic growth, and stop when the situation becomes less favorable. A few good examples are getting rid of business class flights and reducing air travel by using video conferencing.
- Consolidation of spend: Consolidating spend can avoid many hidden costs and result in attractive savings. Organizations can, for example, monitor how much they spend on mobile phones, laptops, and lease cars.
- Improvement of specification: Because technicians are a particular group, they often strive for perfection and thus, look for the most attractive but most expensive solution, while a cheaper alternative may be available.
2. Supply Base Management
Supply base management is all about how to use suppliers in a way that saves costs.
- Consolidating supplier relationships: Businesses can get more value from supplier relationships. It’s possible to gain additional cost advantages by managing and solidifying collaboration with suppliers, establishing partnerships, and looking for sustained cooperation.
- Increase competition: This is the opposite of the first point. Competition between potential suppliers can achieve procurement efficiency for an organization.
- Restructure supplier relationships: Cost advantages can be obtained by sourcing from low-cost countries. Additionally, organizations can consider spreading the total demand for a particular product over multiple suppliers, resulting in ongoing competition.
3. Total Cost Management
Decreasing demand or reducing direct-purchase expenses are the most straightforward ways of realizing procurement cost savings. It is, however, possible to estimate the total costs related to the acquisition of products or services, which might offer advantages such as:
- Optimization of total supply chain costs
- Reducing total life cycle ownership costs: This is an assessment of additional costs that accumulate after the initial product price.
- Reducing or getting rid of transaction costs: Transactional costs are often overlooked even though they are closely related to the process of ordering, receiving, and paying for purchases.
Let’s closely examine the above overview of the types of procurement savings. It is clear that one standard formula cannot be used for accurate measurement. This is mainly because procurement is not an isolated process and requires cooperation from other stakeholders and departments. This complicates measuring and gauging the value of the savings, but it is not an impossible task.
How do you Calculate Cost Savings in Procurement?
Unfortunately, cost savings cannot be measured using one standard formula. Additionally, procurement is not an isolated process but incorporates other disciplines on which it is partially dependent. This makes it complicated to measure and gauge the actual value of cost savings.
In procurement, cost savings are always viewed as a negative change from previous costs compared to the new negotiated price. Cost savings could be calculated from the first offer received or market-related benchmarks without a prior cost reference.
So how do you calculate cost savings in procurement? Experts use the average price of all received quotes and subtract it from the negotiated contract price. This value is then multiplied by the actual number of items bought in a certain period.
Crucial concepts in Tracking Cost Savings
Before we talk about tracking procurement cost savings, it’s essential to know the concepts and elements that should be included in monitoring cost savings.
We’ve already established that procurement is one of the company functions that provide the most significant opportunity to achieve fast and large-scale cost reduction. Large organizations utilize complex processes and tools to track and measure cost reduction. Smaller companies may track cost reduction using a simple spreadsheet— which we’ve already established is not a good idea, nor is it efficient.
The following concepts are crucial in tracking cost savings.
1. Economic Concepts
The most critical starting point is to liaise with the finance department to define the criteria of each measure used. Below are five crucial economic concepts to understand:
- Addressable Spend: refers to the amount of spend that produces reported benefits.
- Cost Savings: in relation to the impact of cost-saving initiatives on the current income statement compared to the previous year.
- Capital Reduction: refers to the impact on the balance sheet because of the levels that exist before and after the sourcing activity. This can include inventory, capital assets, and payment terms.
- Avoidance: is when a company avoids a price increase along any step of the procurement life cycle process.
- Total Procurement Benefits: is the total value created by purchasing. It is calculated using the sum of cost savings, capital reduction, and avoidance. It would show the difference between the outcomes if procurement had or had not done the sourcing activity.
2. Expected vs. Realized Savings
Achieving the best possible return on business spend is a challenge for many companies. The procurement team and finance department have to look for ways to improve accuracy and utility and increase the bottom line when budgeting and protecting cash flow.
However, even when cost-saving initiatives are identified, the actual realized cost savings may not match projections when the contract is finalized. Achieving realized cost savings that match the predictions requires a clear grasp of cost reduction, cost avoidance, and the importance of both process optimization and stakeholder education.
Once the obstacles preventing you from securing optimal realized savings are understood, you can develop strategies to overcome the roadblocks and maximize procurement cost savings.
To give you a better perspective of where the challenge exists, understand that despite expected and realized savings being two sides of the same savings-driven coin, the procurement and finance departments often approach the idea of “cost savings” in different ways.
In finance, cost savings and tracking look at what we call “hard savings.” The department usually wants to implement savings by lowering existing costs or reducing the overall costs of doing business—aka, cost reductions.
Procurement, on the other hand, searches for “soft savings,” using cost avoidance strategies. The idea is to avoid additional costs (via cost increases) or create savings opportunities using skilled contract negotiation and strategic sourcing. This potential cost savings initiative is referred to as identified or expected cost savings.
Let’s look at a real-life example:
Suppose your organization spent $30,000 on transportation of a specific product last year. The procurement department may suggest reducing costs by 15% over the course of the upcoming fiscal year by switching to a new logistics firm. Of course, the expected savings will be 15% of $30,000 which amounts to $4,500.
However, these expected savings will only become realized cost savings if:
- All parties and stakeholders adhere to the terms of the new contract and use the specified logistics vendor.
- The vendor agrees to comply with the terms of the contract.
Moreover, these realized cost savings take time to manifest because they are tracked over 12 months following the contract’s execution. So it’s only a year after the agreement we can verify whether the expected savings have been realized.
Other potential roadblocks to realizing expected savings
The gap between expected savings vs. realized savings can be hard to close. This is because there are many points at which either party could conceivably fail to meet their obligations. It is especially true if your procurement strategy lacks the adequate tools and technology to accurately track spend, receive and pay invoices in a timely fashion and minimize the risk created by rogue or maverick spend, invoice fraud,— and so on.
In addition to the challenges we’ve already highlighted before, here are a few more you should be aware of:
- Poorly optimized invoicing systems: If you’re still using paper invoices and manual workflows, this increases the risk of sending duplicate or incorrect invoices. You’ll end up with higher costs in the form of longer work hours for your staff. Employees now have to spend hours chasing exceptions or tracking down lost or unsent invoices to pay them on time.
- Inadequate internal controls: Poor implementation of measures to ensure contract compliance can result in companies using alternative suppliers to pursue short-term cost reductions, which in fact creates cost increases due to contract violations.
- Maverick or rogue spend: Can be hard to track and factor into budgeting or forecasting for resource allocation. This problem will hinder cash flow management efforts.
- Insufficient strategic sourcing capabilities: Poor analysis and forecasting tools required may result in inefficient procurement. For example, an organization may find themselves purchasing less than they’d planned and thus miss out on the volume discount rate.
Regardless of the reason, the disparity between expected and realized savings creates difficulties for the company that extends beyond the bottom line. An accurate picture of company spend helps to align procurement and finance goals, which improves budgeting, cash flow, and supply chain optimization.
How to Measure and Achieve Optimal Realized Savings
So how can you maximize your procurement savings and achieve your budgeting goals? We’ve gathered some tips on how to change your approach to achieve optimal realized savings.
1. Establish Solid Cost-Saving Practices
All your cost-saving and strategic sourcing initiatives need to work together. As opposed to finance and procurement being rivals, your procurement team should pursue its cost reduction plan while still recognizing the value of the finance department’s cost avoidance efforts.
This synergy will create a formal system for connecting expected savings to realized savings on the final Profit and Loss sheet.
So you can implement a solid cost-saving practice by using the following steps:
- Identify the type of savings: Will it provide an improvement on current pricing? Will the cost avoidance be achieved through negotiated discounts or economies of scale?
- Be specific about the source of baseline data: Is it historical spend data, industry trends, resource availability, etc.?
- Document spend categories, general ledger codes, and relevant cost centers for all savings opportunities.
- Provide details of all forecasted purchase volumes, especially for negotiated spend requiring specific purchase volumes to realize cost savings.
- Include any additional information related to cross-dependencies and assumptions, such as market trends, etc.
- Secure finance approval for procurement savings opportunities. This ensures complete transparency, simplifies budget reconciliation, and solidifies procurement and finance as strategic partners in building organization-wide value.
2. Implement Procure-to-Pay (P2P) Software
The biggest challenge in tracking and improving realized cost savings for most organizations is the precise tracking at the invoice level. The processes of manually entering, monitoring, and verifying every single invoice can be complex on its own.
It becomes even more complicated to add maverick spend and other inefficient processes like paper-based approvals and snail mail invoices and payments. There is no way of avoiding increasing costs and forget about saving money.
A robust cloud-based procure-to-pay (P2P) software solution like Simfoni does the heavy lifting for you and makes procurement savings tracking a manageable process.
3. Make Strategic Sourcing a Priority
Investing in a streamlined, resilient and supply chain with several vendors who all share your values, visions are essential. They must also meet your compliance, performance, and price standards.
Additionally, making use of technology that supports shared success is crucial to achieving optimal realized cost savings.
How To Track Procurement Savings
Now that we’ve covered the fundamental concepts of procurement cost savings, how do you track procurement savings?
Just as all organizations track the revenue generated through sales and marketing, they can also track the cost savings provided by finance and procurement departments. While cost savings may be significantly less than sales revenue generated over the same period, they can directly impact profitability.
To calculate and track procurement savings, there needs to be a baseline current spend level with a supplier. Once this number has been calculated, the next step would be to subtract both cost reduction and cost avoidance.
Keep in mind that as with sales revenues, cost savings are broken down into both expected and realized savings. Additionally, expected savings are identified as part of the sourcing process, so over the duration of the supply contract, the realized savings will be calculated as the total of the delivered cost reduction and cost avoidance savings.
Tracking savings over time is a better way to go about it because it allows you to break downtime periods into milestones. This process makes it easier to analyze and provide valuable management information.
Effectively measuring and reporting savings the proper way consists of three parts:
1. Determining the method and framework
It’s not enough to know what you need to track; organizations need to agree on the types of savings that can be claimed.
Since various types of savings are all very different, your business needs to determine just how these savings will be calculated. Both the formula for calculation and the appropriate starting points have to be determined. Ask yourself the following questions:
- Do you measure per product or category of products?
- Are savings realized every month, quarter, calendar year, or contract period?
You must also clarify how savings will be validated and documented, exceptionally, since various departments often execute sourcing. Make it clear which team is allowed to claim protection.
2. Identifying and quantifying saving opportunities
A solid spend analysis must be the foundation of all cost-saving initiatives. This should serve as your starting point for figuring out any saving opportunities. Spend analysis can also be used as a benchmark to verify claimed savings and should include the following data:
- Number of suppliers
- Spend-per supplier
- Spend-per cost center and G/L account
- A comparison of measured values with benchmarks
The identification of saving options should be conducted per commodity and preferably in interdisciplinary teams to involve all stakeholders. It’s important to identify alternatives and analyze them to determine their savings potential and impact. Once this outcome analysis is completed, you can use it to set priorities and decide on the implementation of saving initiatives.
3. Implementing and securing savings
Creating a unified method for the implementation of saving is difficult because the impact is dependent on the type of saving. Nevertheless, the focus should be on creating savings opportunities that are really turned into a reduction of expenses.
Implementation is a crucial part of realizing the benefits. After all, good intentions alone will not bring results.
Procurement Savings Management Software
A procurement savings management software provides an organization with tools to monitor relevant savings achieved through various cost-saving measures and strategic sourcing initiated by the procurement team. This is especially important when sourcing in the supply chain.
Procurement savings tracking is a digital solution that is becoming increasingly popular due to its benefits.
How does it work?
At Simfoni, our software makes it easy to plan, execute, and track your strategic sourcing and cost-saving initiatives, providing all the information you need on a single, intuitive interface. Our software helps guide your procurement and sourcing teams on ways to save and keeps them motivated by showing them the fruits of their labor.
Additionally, you can:
- Analyze spend trends and opportunities by pulling insights from rich data pools created by automated deep categorization.
- See and share actual savings results as you finish each initiative through savings reporting. Project the future savings from work done today.
- Identify savings activities options. Prioritize based on estimated savings and ease of completion.
- Capture and track your spend more easily when everyone uses the right procurement tools.
Advantages of Procurement Savings Tracking Software
So, now that we’ve discussed what a procurement savings tracker is, what are some of its advantages? We’ve picked out five of them so let’s take a look.
1. You can plug leaks faster
It’s hard to improve a process that is ill-managed. If you’re ever going to get better at realizing cost savings, it’s essential to have procurement savings tracking software.
Think about it this way. How can you manage risk and plug spend leaks if you aren’t sure where the leaks are? A dedicated procurement savings tracking software can effortlessly chart trends and highlight gaps, find, review, and rectify cost savings problem areas.
2. Manage projects seamlessly
Most procurement teams have several sourcing and procurement campaigns running at the same time. In bigger organizations, it’s almost impossible to keep track of all those costs using Excel spreadsheets or Google sheets alone.
Procurement savings tracking software helps streamline the entire process, ensuring that your organization is better positioned to track all cost-saving strategies in one centralized platform.
3. Tailor your sourcing efforts
Do you want to discreetly implement cost-reduction policies? Well, Simfoni’s procurement software securely keeps your data using composable procurement where you select best-of-breed software modules from the same vendor, so they already work together seamlessly with your existing systems.
4. Up-to-date visibility
Procurement software allows you real-time visibility on procurement savings. Traditionally the procurement department would have to wait for the finance department to publish reports before anyone could get a clear picture of how much savings have been achieved by the procurement team.
5. Easy to share data
Procurement software allows you to share and review data with stakeholders quickly. You can host meetings anytime, anywhere to show proof of negotiated savings and overall realized savings. This allows procurement teams to demonstrate the milestones set and achieved with actual results and metrics. This data can help the organization to make decisions that improve its procurement strategies
How Simfoni's Procurement Savings Tracking Works
At Simfoni, we understand the role that technology plays in digitally transforming procurement processes for businesses. Our software can:
- Capture information, analyze data for insights and automate processes. The increase in cross-system flow improves workers’ ability to make data-driven decisions.
- Help you gain level 4+ visibility on your spending patterns with automated categorization.
- Help users can run their own RFx within the company guidelines using already approved vendors. This captures formerly maverick spend, keeps buying compliant, and reduces the workload of the procurement team.
- Flip Requisitions to start an RFQ process that automates the manual work of emailing vendors, collecting responses, and ranking proposals.
- Gain insights on your procurement efficiency from your existing contracts. Investigate standard terms, what is under, and not under contract, and the possible risk of non-compliance
Thanks to advanced data analytics and artificial intelligence (A.I.), you can also:
- Collect, manage and view, all spend data on a single, centralized platform that’s mobile-friendly and device agnostic.
- Customizable Dashboards, charts, and reports
- Eliminate redundancies while still including contingencies.
- Consolidate project and task management
- Import spend transactions and compare them against the previous year
- Use several contract management tools to leverage spend data at the negotiation table to secure the best possible terms and pricing.
- Work with finance to balance cost savings with cost avoidance when budgeting, forecasting, and making sourcing decisions.
For organizations serious about cost savings, investing in a procurement savings tracker is non-negotiable. It provides real-time overviews of actual realized savings. It makes it possible to conduct savings initiatives that impact not only your bottom line but streamlines your entire procurement process and allows collaboration between departments.