Some Purchasing Departments live and die by the savings numbers. Everyone involved with generating savings numbers hates them. Everyone knows they are not perfect and the system is flawed, but since nobody can come up with something better, we're all stuck with it.
Why do I think they are somewhat bogus?
They are pegged to a baseline which becomes irrelevant soon after it's established. Example: Pick a commodity with price fluctuation such as the paper market. The baseline spend is established when the RFP is created. Savings projections are done by comparing the bidders' prices to the current vendor's prices. A new vendor is chosen and savings reports are drawn up.
If market prices always stayed the same, then the reports would always be accurate. However, paper pricing fluctuates. If you hit a downward trend, it will look like you are saving more and more every month. Aren't you brilliant? Look at what a great job you did with that new paper vendor.
If market prices suddenly increase, your savings numbers evaporate. Suddenly that was a bad deal? No, it's that the market changed. It would have gone up just by the same percentage (or possibly more - there was a reason you switched after all) with the previous vendor too.
The only solution would be to re-work all your numbers taking into account a third party index (if your contract is even tied to one) to factor in market fluctuations. You would also have to contact your old vendor and find out what their current prices are for the paper.
Do you know anyone who does any of that?
More to come on this topic in the future!
» There Go The Savings Reports from PurchaseRealm
Fans of this column know that I'm not really a huge fan of savings reports in general for many reasons. See Why Savings Reports Are (Somewhat) Bogus for details. Here's a good example. Try creating, justifying, and tracking a... [Read More]
Tracked on: April 26, 2006 4:30 PM | Permalink to Trackback