“How an organisation measures procurement savings is usually a topic of considerable debate. Of equal interest is “How does Procurement influence / make the savings happen?” says Alan Low of Purchasing Index.

“Savings that are promised but not actually realised are becoming increasingly “hot” topics for senior management (and for Procurement).” He mentions a recent Aberdeen Research report where the results from a survey of over 500 companies revealed that only 30% of the savings claimed by Procurement actually got to the organisations’ bottom line.

Air Travel as an example:

“To examine why this happens one need only look at a spend category such as domestic air travel. Procurement may negotiate lower air fares with Airlines, only to find that staff continue to fly at short  notice or just take more flights.”

“Has a saving been made? If the strategy was to reduce overall costs and make the organization more profitable – probably not”, says Low.

And the same applies to just about any spend category – PCs, Multi Function Devices, consulting services, etc, etc.

Close collaboration with business required- Can we cut the budget?

For Procurement to be truly effective it must work very closely with the Business Units it serves. Negotiated price savings can be turned into increased profits if the quantity of the goods and services bought is kept at the same levels (or reduced). One of the most effective ways to do this is to set up a process that allows the Business Unit to agree the savings that have been negotiated by Procurement, and then cut the relevant budget immediately.

This presupposes a close working relationship between Procurement and the Business Units it serves and a budgeting methodology which is detailed and thorough; not always the case! For many organisations, not just in the public sector, there is still an almost fanatical desire to use up the whole budget, mainly so that an increase in the next year’s budget can be justified.

Zero based budgeting to be investigated

Perhaps there needs to be a ‘sea change’ in the way budgets are created (for instance zero-based budgeting) and an acceptance that budget increases may be justified in certain circumstances during the period to which they apply.

Low’s company Purchasing Index is presently conducting a survey which will  benchmark how different organizations measure and achieve savings. If you would like to discuss this topic in more detail, please email the author at alan@pricetrak.co.za