This is a re-post. Original post can be found here.

I recently connected with Prof. Samuel D. Bornstein on LinkedIn and I’ve been following his summaries of nationwide government Strategic Sourcing initiatives with great interest. One in particular caught my attention, where it seemed that the state of Pennsylvania’s strategic sourcing savings were based on “cost avoidance” rather than actual measurable unit price savings. At first glance it’s easy right-off “cost avoidance” as not being true “savings”.

A real life example might be if I decided not to buy a $1000 suit. Have I just saved $1,000 in cost avoidance? Maybe not… What if I don’t need a new suit right now, but I find one on sale for $800. Am I therefore achieving unit price savings of $200 if I buy the suit just in case? These scenarios highlight why measuring savings can be trickier than you would think…

Moving from a purchasing policy of “just in case”, to “just in time” can help organizations spend less and help avoid unnecessary purchasing. When it comes time to audit the success of the purchasing policy though, it can sometimes be difficult to accurately frame the “savings”, particularly if your audience’s perception of savings is tied to unit price. Ultimately government departments will spend their budget whether or not they avoid unnecessary purchases, or purchase goods at lower prices. Where quantifiable savings can be made is in the process rather than simply driving the unit cost down.

As an example, let’s say I need a new desk chair, and after searching the internet and calling local vendors, I found a way to save my organization $50 on the desk chair I need. I can even save on shipping, if I drive the company vehicle across town to purchase the chair. When I get there, I find they have four chairs available at the special price, so I purchase all four (just in case someone else might need a new chair a a later date). Now I’ve saved the organization $200! Then I return to the office, submit the receipt/invoice to accounts payable to process a reimbursement/payment, which then routes to my manager for approval, and eventually a check is cut.

In this scenario, I have achieved lower prices for these goods, so by definition, I have just saved the organization $200, right? Not so fast… More likely I’ve just cost the organization well over $200 by incurring mileage and fuel cost on the company vehicle, plus I’ve spent half my day researching the chairs and driving across town. In addition I’ve taken multiple employees away from their day-to-day jobs, thus reducing their productivity and costing the organization at least a day’s time and materials. Plus, I now have three extra chairs gathering dust, taking up valuable storage space, that may never be used. Finally, the vendor is probably not on contract, so that opens up my organization to other potential risks down the line. While the process is certainly not optimal (approval after the fact), this practice of buying more than is immediately required is typically defined as “just in case” purchasing. This is likely what the State of Pennsylvania were talking about when they said, “avoiding unnecessary purchases is a cost saving”.

So let’s say my organization implements a new purchasing policy, backed by an automated system, that prevented these types of “just in case” purchases from happening. Now any purchasing of furniture is quick, easy, on-contract and in adherence to policy. Would we then be able to prove serious cost avoidance savings? Maybe… but we would still have a hard time convincing the average Joe. Trying to prove those savings gets muddy really quickly, and this is why it seems obvious to blame a screwed analyst when the numbers seem to good to be true. To prove these types of savings, you can end up wasting a lot of time and energy trying to define what “could have” happened, and what the purchasing process “might have” cost. Trying to calculate savings based on those variables could ultimately lead to an argument about the definition of “savings”, rather than discussing whether or not the new purchasing policy/process is a success.

Ultimately a lot of organizations (public and private) have antiquated purchasing policies (focused on control) and labor intensive purchasing processes (focused on auditablity). Procurement/sourcing professionals need to be incentivized to remedy these resource-draining issues, rather than be constantly measured on unit cost savings alone. In other words, why grade them on how well they can negotiate the cost of paper, if they can help your organization go “paper-less”?

Author: Daniel Perry