SAS - Sourcing Activity and Savings

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Questions

• How many companies track Savings ?

• How many companies track the Addressable Spend ?

• How many companies track Capital Savings ?

• How many companies include Avoidances into Savings ?

SAS - Sourcing Activity and Savings

A tool to register : Addressable Spend

SavingsCapital Reduction or Capital SavingsAvoidances

TPBTotal Procurement Benefits

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Benefit Metrics

• Total Procurement Benefits (TPB) = Total Benefits vs. what would have happened if Purchasing had not done this project or activity.

• Cost Savings (EBIT Impact) = Savings vs. the price paid in the previous period for expensed items.

• Capital Reduction = Savings vs. the price paid in the previous period for capitalized items.

• Cost Avoidance = Soft savings based on forecasted price vs. new price paid. It reflects & avoid potential negative impact to the Income Statement or Balance Sheet in the future

• Addressable Spend = the amount of spend that generated the reported benefits.

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EBIT IMPACT

Income Statement

CAPITAL REDUCTION

Balance Sheet

Total Procurement Benefits (TPB)

All value delivered by Purchasing (savings, avoidances, and other benefits)

SOFT SAVINGS

Example: cost avoidance & capital avoidance

Value creation relative to potential or anticipated negative impact to the Income Statement or Balance Sheet in the future

Value creation relative to the costs and levels existing at the onset of the sourcing activity

TPB

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Avo

ida

nce

EBIT +

or

CR +

TP

B+

TP

B+

Avo

ida

nce

EBIT -

or

CR -

EBIT -

or

CR -

EBIT +

or

CR +

TP

B+

Avo

ida

nce

TP

B+

Po = Old Price = Contract Price, Last Price Paid, Average Price

Pf = Forecasted Price = RFP Average Bid, Market Index, Market Projection

Pn = New Price = New Implemented Price

Avo

ida

nce

TP

B+

EBIT +

or

CR + TP

B+

Understanding Price Scenarios

EBIT – Cost Savings

CR - Capital Reduction

TPB – Total Procurement Benefits

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Savings Timing

• Like 6 Sigma, savings are valid for the next 12 months after the sourcing project, even if it is a contract for three years.

• Savings = (Actual Price – Previous Price) * Forecasted

Quantity (12 mo.)

Expected Realized Realized

Once a quarter, consumed quantity and price are checked

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• Expected Benefits

The benefits that are expected during the first 12 months following full implementation of the project or activity

• Realized Benefits

The benefits that are actually delivered during the first 12 months following full implementation of the project or activity

The actual benefits could be larger than, equal to, or less than the planned benefits

Expected vs. Realized Benefits

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All Benefits entered in the SAS tool are “Expected” because we assume we will have a specific price and a forecast of quantity for the next 12 months.

After 12 months, we should check the actual price and actual consumed quantity to calculate “Realized” Benefits.

The metric “Expected” drives the organization to do sourcing project all the time during the year.

The metric “Realized” shows the real impact of Benefits in the Income Statement.

Suggest start with Expected and after 2-3 years start the Realized

Expected vs. Realized Benefits

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SAS Tool

Excel (macro enable) with four tabs

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SAS Tool

To register the sourcing project details To register RFP details

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SAS Tool

Comments to help

Action buttons

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SAS Tool

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SAS Tool

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SAS Tool

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SAS Tool

SIMULATION IN THE SAS TOOL

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• Addressable Spend: measures the efforts in Purchasing in sourcing products and services. The average addressable spend per employee shows the efficiency of the organization; the existing capacity or production rate that can be used to justify new resources with increase of the spend in the company.

• Cost Savings and Capital Reduction: measures the quality of the projects or activities performed by Purchasing. This is a measure of the effectiveness of the organization and can be measured by the percentage of savings per addressable spend.

• Avoidances: measures the efforts from Purchasing to avoid price increases. Research studies show that companies tracking avoidances present lower long-term costs than companies without tracking.

• TPB: measures in one single metric the overall performance of Purchasing.

Benefit Metrics

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Implementation

The best way to implement is first to discuss with Finance and get their validation. If possible, we should have one person from Finance to validate the numbers before publishing as a kind of auditor. There are several cases where someone needs to be the focal point to clarify and approve if it is savings or avoidance.

Then, present to the businesses to get their understanding and validation.

From Purchasing, the ideal is to have one file where all the buyers use the tool. If, not keep one version in each region as FileName-Region, then once a month consolidate the data into one master file.

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Lord Kelvin’s wisdom of the 19th century is still valid today:

“If you cannot measure it, you cannot improve it.”

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Thank YouPaulo brings more than 12 years of international purchasing experience from a Fortune 50 company. He was able to transform a global purchasing function from tactical to strategic, moving savings to higher levels than reported by first quartile Purchasing organizations.

Prior to this, he developed experience in such diverse areas as manufacturing, R&D, Sales, Marketing, Finance, Strategic Planning, and e-Business.

A native of Brazil now based in the U.S., he holds a Bachelor’s degree in Chemistry and Chemical Engineering, with a Master’s degrees in Industrial Management and in Business, and executive course certifications at Kellogg, Wharton, and MIT Sloan.

Referrals – http://www.linkedin.com/pub/paulo-moretti/0/916/1a4Website – www.pm2consult.comE-mail - paulomoretti@pm2consult.comPhone - +1 989 859-6422

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