What Kind of Saving is it?

moneySo the summer is nearly over and the kids have returned to school.  I hope you all enjoyed some sun over the past couple of weeks.

Since my own return from holiday, I had an interesting conversion with one of my preferred suppliers about how sourcing teams ‘claim’ for savings they make and what they do in the following year after the initial (in the year – ITY) saving.

My view was, that if the contract would have continued at the old rate had the saving not been generated, then it is fair to claim ‘Roll’ for year two etc….  although I appreciate not all Finance functions would easily agree to this.

The supplier then asked whether there were any areas where you could get two savings at the same time.  Good Question! Here’s one example:

Saving 1:      If it is something that is bought by the unit and you negotiate a reduction per unit, you claim the saving based on volume validation, whereby the saving is the number of units purchased x the reduction per unit.

Saving 2:       Then if you reduce the number of units bought, you would claim a further saving around Demand Management.

The key to identifying savings is to agree the definitions around the various Supply side and Demand side savings types, and there are many of each kind.

Finally, one of my favourites is Marginal Cost.

Marginal Cost is the change in the overall cost that happens when the quantity purchased changes by 1.  In other words it is the cost of producing ‘just one more’

A definition I saw described it as: marginal cost equals the change in total (or variable) cost that comes with each additional unit produced”

So, next time you are meeting a supplier who provides you with units of goods, try asking them what the cost of just one more is – all the fixed costs ought to be built into the original quote so any increase in units should be cheaper.  The level of reduction you will eventually get will depend on how well you are able to understand the supplier’s costs.

Good luck…! And if you want a full list of savings types, drop me a line.