How to Set Up a Procurement Savings Tracker
No matter the industry that you are a part of, every business requires procurement of some sort to keep operations flowing. Whether this is through direct or indirect spend, it is essential to look at your procurement culture through a cost-optimized set of lenses. In order to optimize spend and establish an efficient procurement organization, you will need to ensure that you have a firm grasp of what your overall procurement and spend are - but how can this be done?
It is easy for areas of the spend to be unaccounted for, especially within a fast-moving organization that is trying to increase revenue year over year. While revenue is important to track, bottom line is the true health of your business. Instead of recklessly spending and chasing revenue, this is where the establishment of a procurement (or cost) savings tracker will provide critical visibility into your organization.
Establishing Your Procurement Savings Tracker
You will want the procurement team to take ownership of loading the cost savings each quarter and ensure that you are keeping track of the following data fields:
Cost Savings ($ Amount) - As you dive into the spend, ensure that your tracker clearly estimates the dollar amount of your cost savings. This can be compared against both year-over-year and budget.
Supplier - Cost savings by supplier and the sourcing event will be essential to showcase in your procurement savings tracker. This may be blank if the savings are not tied to a purchase request (PR) or specific supplier, such as savings due to an increase in payment terms for all of procurement.
Procurement Owner - This field showcases the resource in procurement that generated the cost savings. Each purchase request (PR) should have a specific person tied to it that submitted the request. You should be able to dive into each spend category and see who submitted the most purchase requests, as well as who generated the highest dollar amount in procurement cost savings.
Business Owner - This will be the business stakeholder who requested the sourcing event. Much like the procurement owner, it will showcase who is requesting spend amounts and ultimately who is directing certain categories of the spend.
Lead/Assist - Separate procurement and business owners in the breakdown of cost savings by categorizing them as “lead” and “assist”. Enter “lead” when procurement took the primary role in obtaining cost savings and “assist” when the business owner was primarily responsible.
Comments - Include brief explanations on how the cost savings were generated. This is especially important for indirect savings, as there will not be one correct way to compute the savings; which is why comments will be essential in the explanation and methodology on how procurement determined the cost savings.
Financial Planning & Analysis (FP&A) Reviewed (Y/N) - Procurement will need to team up with Financial Planning and Analysis (FP&A) every quarter and review all cost savings. This ensures that savings are validated by Finance and the methods in which they were computed.
Spend Category - A detailed and thorough analysis of each category for the spend will be essential to your procurement savings tracker. This can be broken down by the general ledger (GL) account or the procurement commodity code.
Date - Ensure that the dates cost savings were generated are included in your tracker. This should include both the specific date (month, day, year) as well as the quarter.
For a multiple-year deal, the most advantageous method in tracking savings will be through taking credit of the savings at the time of PO execution (e.g. for a three-year deal with savings at $200,000 per year, take the $600,000 savings in the quarter that the PO is executed). Another option would be taking credit for the $200,000 for each of the three years, but this will increase the complexity of tracking the savings. Therefore, it is best to keep it simple and use the former option.
Identify someone on the procurement team to administer the cost savings review each quarter and remind all team members to enter their savings within one week at the start of each new quarter. Once procurement has validated all savings, set up the quarterly review with FP&A. During this meeting, each procurement owner will need to discuss their respective savings. Once this has been completed, FP&A should identify one to two savings items that will be the primary focus for procurement owners. This allows FP&A to drill down on the savings and audit the numbers.
Getting Started With Your Procurement Savings Tracker
Setting up your procurement savings tracker is relatively simple and straightforward, and you will find that you may be utilizing it after only one month of building the tracker. Having FP&A validate the numbers each quarter will further reinforce that the savings are accurate. The procurement savings tracker will allow for alignment within the procurement organization to drive cost savings for the whole company and implement a leaner procurement approach.
Cost savings for indirect procurement is a key metric to track to validate the value proposition of the procurement team. At the beginning of each year, the procurement team should decide on a yearly cost savings goal in partnership with FP&A. Having a cost savings tracker ensures good alignment with the procurement organization to drive cost savings for the company.
Mike Glass runs GPC (Glass Procurement Consulting), a procurement consulting firm focused on optimizing a company's spend. Mike has worked in senior procurement management positions at NVIDIA, Google, Meta, Fitbit, and Flextronics. Mike would enjoy getting your insight on any procurement topic, feel free to contact Mike at mike@glassprocurementconsulting.com.
