Are You Accurately Reporting Your Cost Savings?
By Stephen Machin, CMA

In order to show senior management that your cost reduction initiatives are bearing fruit as expected you need to be able to report the results accurately.  There are 3 common pitfalls that many companies fall victim to in their cost saving reports.  Cost savings is the most common performance metric executives use to evaluate their purchasing processes, so it's critical to have strong cost savings reports.

Today, we'll examine three problems found in cost savings reports.  Evaluate your approach and try to avoid having these problems with your cost savings reports.

Pitfall #1:  Baseline errors - The most common way to measure savings is to multiply the quantity purchased by the difference between the price you will pay and some higher baseline price.  Make sure that your baseline prices are approved by the senior management upfront.  There is nothing worse than going through the whole process and reporting the savings only to receive pushback from the executives on the baselines used in your report. 

Pitfall  # 2:  Quantity Errors -  it is important split out price savings and quantity savings in your reports.  Because the price you will pay is lower than the baseline price, the more you buy the more savings you can claim.  However, if your volumes drop, then the actual savings you report will be less than the original estimate that you gave senior management.  If you have also implemented process changes that will reduce the quantity required then you should highlight those as additional savings in your reports. 

Pitfall  # 3:  Failing To Adjust Budgets -  To executives, lower costs means  higher profits.  If you report that you will save $100,000 this year in the purchasing of a particular product or service then they expect profits to be that much higher.  If the line managers see this savings as free money that they can spend on other things that they hadn't budgeted for, then the “cost savings” is not really a "profit improvement."  To actually improve profits the budgets must be reduced by the amount of the cost savings.

At the end of the day senior management respond to results that the can measure.  The ability to report accurate and credible information related to your cost reduction initiatives is vital to achieving the appropriate recognition and rewards for your efforts.