We recently introduced our new book Procurement Loves Finance, which is about building and nurturing the relationship between procurement and finance.
One key element there is trust between these parties. Trust comes from mutually agreed definitions (what savings are) and fact-based figures which are aligned with the shared definitions.
When we go to the topic of Procurement Savings, the first thing to do is to define what it exactly means.
For me, this refers to how much is currently paid for a certain good or service compared to what has been spent on the same commodity before. On top of that, it is also on how the world has evolved around what has been one’s personal contribution to that change.
Sounds simple, isn’t it? Let’s dig in a bit deeper.
The core components in measuring savings are:
- How much are we spending for this product now?
- What is the unit price?
- How much are we buying (volume)?
- How did we spend last year?
- What was the price?
- How much did we buy?
So far very clear cut. Based on this, we can easily measure what portion of change in spending is caused by price and volume (not a bad thing, but if business is booming, we need to feed the demand). However, because we are not living in an isolated bubble, there are external factors that affect our business:
- How have the currency rates developed from last year?
- Something that as a procurement organization we have very limited possibility to control, but can cause sometimes major changes in our spending.
- What has happened to the market commodity prices?
- Quite often at least part of your purchases are dependent on global commodity / raw material prices. For example, Metals, Chemicals, Oil, Food products and so forth, are sometimes volatile due to global demand and supply. This affects the prices we pay either directly or indirectly, and is also something which is not in our control.
As the external factors also impact purchase prices, we need to take those into account when measuring procurement savings. They might result in cost increases or give us ‘unearned’ benefits, so we need to understand their impact in order to build a trustworthy picture of how we are doing as a procurement organization.
To answer this challenge, we have created a solution that we call SavingsBridge™.
In a nutshell, we take the data, split the spend change into above mentioned components, and as a result, you have a full view of your procurement savings and the contribution that procurement has done to improve the company’s bottom line.
It is based on facts and bottom-up calculation, making the results not only reliable, but also easy to communicate. One can also do a deep dive into transactional level to gain further justification on where do the figures come from.
Perhaps the most important part of the whole process is that it is not a one-off exercise done by an external consulting agency which is usually already outdated once published. By doing this on a monthly basis, you have a powerful tracking and communication tool between Procurement and Finance on what has been done and what is the procurement contribution to bottom line at the end of the day. The fact that it’s automated and works with a few clicks is just the cherry on top.
The model is based on our more than a decade extensive experience of working with procurement organizations in different industries and global settings. All these are explained more in the book. Proven valuable and significant, it will paint a picture of solid understanding of the need for collaboration between Procurement and Finance.