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Without rigor, important practice left open to criticism

Every good supply chain operation is constantly seeking opportunities to save dollars. It is accomplished in many ways such as getting a lower price on a single transaction, completing a contract that lowers cost, negotiating a capital deal, sourcing alternative suppliers or products, eliminating or reducing freight costs, helping to lower utilization and more. This is important work and should be highly valued by the organization.

We in the supply chain know we are savings significant dollars – but does the rest of the organization? Even if they acknowledge that you are generating savings, do they know how much? Do you?

The savings that is generated can and should be very impressive. How impressive can be a function of both the amount and how well it is documented and communicated. Imagine you are the organization’s CEO. How would you react to these different statements?

• "We saved lots of money last year."

• "We saved $2 million dollars last year."

• "We saved and documented $2,836,000 last year."

Just looking at these three variations it is not hard to see how the last is a much stronger and believable statement than either of the others.

Best practice organizations track their savings with a degree of rigor that would make the last statement possible. Further, they have a documentation process that demonstrates the validity of the savings so there is no question about how it was computed. Only in this way will this accomplishment be fully valued by the administrative team.

It has been my experience that administrators are often skeptical about savings claims from materials. There are many reasons for this, not the least of which is the fact that some claims are, in fact, nebulous. Your savings collection process must assure that all the savings you are collecting are true savings. I have seen individuals claim inventory reduction as savings (only the carrying cost value is savings). I have seen capital savings calculated off the list price. I have seen individuals take credit for a savings from a new GPO contract where no product conversions were required. In each of these cases the savings would not be real and/or attributable to the department. Claiming these types of savings just puts other, real savings in question.

Discuss with your direct report administrator what you will include in your savings report and how it will be calculated. Typically savings will include:

• Transactional savings where the requestor expected a certain cost and you acquire it at a lower cost (actual cost reduction).

• Elimination or reduction of freight costs.

• A new contract that lowers cost (expected savings based on projected usage for one year).

• Capital equipment negotiations (final price less than some benchmark price).

• Implementing a GPO contract where product and/or supplier conversion is required (expected savings based on projected usage for one year).

• Savings generated by Value Analysis or other ad hoc initiatives which you influence.

• The carrying cost from inventory reduction projects.

You may or may not take credit for cost avoidance. Discuss this in particular so there is no question on whether it will be included.

Once you have agreed on what is savings and what is not, develop a systematic way of collecting savings data. It must provide sufficient detail to demonstrate that the savings is genuine.

The best system I have seen had three parts. The first part was a savings log where each savings initiative was listed with the date it was approved, the vendor involved, the department that will benefit from the savings and the savings amount. The second part was the backup documentation for each savings initiative. For each there was a separate sheet that showed how the savings was calculated. For a simple savings it would show the original item cost, the new item cost, and the expected annual volume (usually based on the previous 12 months). The more complex the savings, the more involved is the documentation. But each one should be sufficient for a reasonable person to review it and agree that there is savings and the amount of the projected savings is reasonable.

The third part of the system was a duplicate copy of the information. This is optional but a very nice touch. Once each month the supply chain executive (SCE) brings the book to the administrator. They discuss the month’s accomplishments and the SCE gets the administrator’s approval of them. This book is left with the administrator who returns the book that was left the previous month. The SCE takes this second book, updates it with the information that was just left and begins listing new initiatives.