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MEASURING COST SAVINGS AND BENEFITS REALISATION
Greg Edmonds - Project Procure
www.projectprocure.com.au
www.projectprocure.com.au
Overview
Introduction
Cost Savings
Measuring Savings
Benefits Realisation
Q & A
1
2
3
4
5
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Cost Savings - Cost Avoidance
A saving is an outcome that can reduce budgets. Outcomes are only savings if they are realised and are quantifiable.
Cost avoidance is an outcome that attempts to thwart price increases and to keep within budget. Cost avoidance is not a saving;
What are savings? Few Examples
Agreeing a straightforward reduction in price
Sourcing or developing a lower quality item (that still meets the purpose) at a reduced cost
Negotiating retrospective rebates, improved payment terms etc.
Negotiating improved terms and conditions, improved service levels etc.
Source: CIPS
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A Typical Savings and Benefits Measurement
1 Define the scope
Define the units of comparison
Baseline the current costs
Predict-the future costs
Compare: what are the savings and benefits? (Budgetary Non-Budgetary)
Ongoing Measurement
2
3
4
5
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Savings and Category Types
A study by KPMG across direct and indirect categories in various sectors reveals:
Procurement generally influences less than 60% of spend across both direct and indirect categories.
Centralised and centre-led functions report the highest levels of cost reduction and spend under management.
Savings Achieved~3-5% on direct categories and ~3-10% on indirect categories
Source: KPMG 2012
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Savings and Asset Types
Visible in cost flow
Atypical
Amortised/Depreciated
Long-term assets
P&L Impact: Over time
Savings on Capital Expenses
Visible in P&L
Typically recurring
Expended
Selling, general and
administrative expense
P&L Impact: Immediate
Savings on Operational Expenses
Capex
$$$$$$$$$$
Opex
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What is the most important metric for measuring procurement s performance in your company?
Identified SavingsImplemented SavingsBooked SavingsCost AvoidanceSpend Under Management
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What Do Best in Class Organisations Achieve?
Check your maturity class..
Leakage
Identified SavingsIdentified Savings Negotiated Savings Implemented Savings Bottom Line Savings
Analysis Sourcing Project Payment
Procurement Finance
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Savings - Challenges
Savings means something different to different roles in organisation
Sourcing/Buying Manager: Savings can mean incremental discounts I negotiated from the supplier s first quote or otherwise benchmarked market process across anticipated purchase volumes
Finance Manager: I may look at savings as the direct costs or expense reductions reflected as a positive variance or working capital improvement in my budget
CFO, Controller or Treasurer: Savings is something that impacts earnings or cash-flows plans including financing and global exchange implications
Procurement savings get lost in translation
Lack of common standardsLack of consistencyLack of breadth in definition
Procurement savings has traditionally lacked credibility
Procurement in the past has been guilty ofCarrying over savings from previous yearsInconsistencies in establishing market benchmarksAssumption with high inflation ratesMishandling of changes in unit price and quantityOverestimating savings assumptions due to process change
Baseline determination
Determination of baselineProcess standardisation
Reinvesting the savings
Savings in government sectorSavings against the baseline spend
CultureSavings in government sectorSavings against the baseline spend
Supplier Relationship
Miscommunicating the value delivered by a service provider Savings against the baseline spendImpairing the relationship between the client/company and the service provider
Challenges
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Where Could Savings Be Lost?
Issue(Examples) Category How can it happen How can it be avoided
Price non compliance Marketing Rate cards are not being adhered toCost tracking
Standardised reporting
Category management
Cross referencing with periodic
spend analysis
Supplier performance
management
Vendor non compliance General professional services Sourcing from non approved agencies, suppliers
Volume non compliance MROSKU s have been changed. Spend is up, volume on negotiated SKU s is low
Delays Packaging Negotiated SKU s are not entered into ER delaying savings inflow
Clear process ownership during sourcing transition
Change of scope/requirements IT Hardware change, scope change during the implementation
Proper needs gathering and approved checks for decision impacting savings
Contract governance TransportationFreight savings diminished due to unstructured accessorial changeswith carriers
Regular spend analysis
Category management
Commodities Direct No proper index/indices used for price adjustments
Proper mechanisms for price escalations
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Making It Count Critical Components For Benefits Realisation
Process Outline ownership and method of savings, tracking and compliance
Category & Contract Management
Strategy for category management, contract management and monitoring supplier performance management etc.
Technology Technology adoption for tracking savings identified vs realised
Collaboration Collaborate closely with finance, stake holders and suppliers
BenefitRealisation
Process
Category & Contract Management
Technology
Collaboration
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Process
Analysis
Opportunity
Identify
Prioritise
Implement
Monitor
Stabilise
Execute
Keep Control
Realisation
Plannin
gTrackin
g
Savings
Budget
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Quick Poll
How are you tracking your savings?
Excel SpreadsheetAutomated ToolSoftwareOthers
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Maximise Savings Through Technology Adoption
Technology adoption and metrics monitoring
Will offer decision makers the ability to monitor and measure KPIsrelated to cost reductions and cost avoidance.
Identified SavingsNegotiated SavingsImplemented SavingsBottom-line Savings
Technology Adoption within Procurement
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Maximise Savings Through Category and Contract Management
Negotiated Savings from
Sourcing (100%) Realised
Savings(76-86%)
Lost Savings via Leakage (14-24%)
Average Savings Leakage 21%
Contract Compliance
Implementation Process
Contract Negotiation
Source: Aberdeen
Effective contract management is one critical element for the successful realisation of benefits
Time
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Quick Poll
What are the biggest challenges when sharing savings information within your organisation?
Lack of TimeEase of UseScalabilityAbility to Demonstrate Savings
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Collaborate
Involvement in validation of spend and baseline determinationOngoing cost tracking, compliance measurement, non-compliance reportingAgreement on savings tracking and reporting methodologies (Templates & Frequency)
The below table reflects direct opportunities gained by increased internal collaboration.
Suppliers
Finance
Stakeholders
Spend Analysis Sourcing
SavingsTracking
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Thank You
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Project Procure is part of the Charles
Kendall Group of companies