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:.
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
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
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,
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
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.