1 Reply Latest reply on Nov 12, 2010 9:15 AM by Nima Bagheri

    How To Calculate Sourcing Savings

    Tom Hardesty Newbie

      What is the best practice for calculating savings from strategic sourcing?  1) Savings determined at contract execution and forecast forward to determine annual impact; 2) Savings  determined on captured P&L impact and accounted for monthly or quarterly; 3) Other not listed in 1 or 2?

        • Re: How To Calculate Sourcing Savings
          Nima Bagheri Journeyman
          Negotiated Savings*
          Realized Saving**
          Definition
          §Savings on a new or existing deal or contract that was driven by the Procurement team in collaboration with their business partners
          §Portion of identified savings that finance confirms will have a direct impact on the budget / forecast or be used to offset expense increase elsewhere
          Business Driver
          §Aligned with Contract Negotiator’s goal to maximize value of each contract for their business partners
          §Aligned with business goal of expense reduction
          In Scope
          §Negotiated savings from “baseline” (defined below) for new or existing contracts
          §Rate Reductions
          §Savings from a proposed increase
          §Innovative recommendation resulting in reduced spending
          §Savings that has a direct impact on the budget or forecast or used to fund spending in other areas
          §Must be tracked (cost center impacted, effort accelerated, etc.)
          Out of Scope
          §Favorable outcomes (example: additional work added to the contract for the same cost)
          §These will be captured separately for reporting purposes
          §Business unit driven scope or volume changes
          §Any identified savings that does not meet the above criteria
          §Favorable outcomes and business unit scope or volume changes
          Measurement
          §Contract of 1 year or less:
          §Savings over the 12 months following contract signing
          §Contract of more than 1 year :
          §Savings over the 12 months following contract signing + NPV of Out Year Savings (5% Discount Rate)
          §Savings confirmed by Finance through performing budget analysis (operating or capital) and analysis of impact to the Income Statement.
          High Level Process
          1.Establish Baseline: starting point for negotiation as agreed upon by the business partner
          2.Upon Contract Signature, calculate difference between final price and baseline using the method described in the above Measurement section
          3.Confirm savings with Procurement Management
          1.Establish Baseline: starting point for negotiation as agreed upon by the business partner
          2.Submit identified savings and backup materials to Expense Management team
          3.BU / CU Liaison will work with local finance teams to determine realized savings