Are Your Cost Savings Reports Believable?

Purchasing often fails to get management's respect because its cost savings reports aren't believable. But you can make your cost savings reports more believable if you can understand and reconcile the difference between "cost savings" and "expense reductions."
 

When you claim cost savings, management expects to see the expenses on its financial statements lower than the previous year. In many cases the cost savings you report are much different than the change in expenses. This disparity hurts your credibility. Managers with a financial background were trained early in their careers to reconcile financial reports - ensuring that differences between numbers from two sources are accounted for. You should account for the differences between your cost savings and the actual expense reduction. Here are reasons cost savings exceed expense reductions. Think about how to reconcile these in a cost

savings report. Quantities Increased: If you paid $2.00 per pair of safety goggles last year and this year purchased 10,000 goggles at $1.50 per pair, you'd probably report a cost savings of $5,000 ($0.50 x 10,000), right? But what happens to the expenses if you only bought 5,000 last year? That's right, the expenses increased from $10,000 (i.e., $2.00 x 5,000) to $15,000 ($1.50 x 10,000)! So account for that when reporting cost savings, explaining that while the quantity increase would have resulted in expenses rising by $10,000 if last year's price was held, you offset $5,000 of that increase by improving pricing.

New Expenses Arose: If you purchased large quantities of an item that your organization never used before, you don't have a price benchmark. If you negotiated the low bidder's prices even lower, you'd likely report the negotiated difference as your cost savings. But what do expenses do? They go up because you spent money on a category on which you spent no money last year. Increases Aren't Reported: Cost savings are often reported in isolation. Let's say you reported cost savings of $100,000 for reducing costs in one category by that amount. But what if the spend in your other categories increased by a total of $200,000? Should you still report $100,000 as your annual cost savings?

Better-Than-Market Performance Is Counted: Many purchasers measure their cost savings on price-volatile commodities (e.g., petroleum-based products) by comparing percentage cost changes with indexed cost changes in the market. But before claiming cost savings when you "beat" the market, consider how management may see things in terms of expense reduction.