Procurement Services experts

Overview

When organisations focus their attention to supplier cost reduction, the first question that usually gets asked is ‘sure, but how do we know where to look’?  

Developing a cost savings plan on supplier spend is a critical first step to delivering supplier cost savings that optimise outcomes & use of resources. There are countless examples of organisations rushing off in one direction, only to have to pivot to another project once further information has come to hand. But a savings plan is more than just project selection, its identifying the quantity, order & strategy for each project, all of which require some prior assessment to identify the best plan of attack.

What is a cost savings analysis

A cost savings analysis is the process of identifying cost savings from your supplier base. Once completed, the supplier cost savings analysis is an overarching document of potential cost savings opportunities, with each project outlining the key inputs such as annual spend, estimated savings, timeframe, strategic rationale & risk level.

Why conduct a cost savings analysis?

Once an organisation decides to focus attention on cost reduction, its usually an activity that is urgent so the temptation is to rush into the areas your experience or intuition inform you to prioritise. However, there are a number of variables that determine the quantum of savings, probability of success & level of risk, which ultimately determine whether a project is a winner & how it compares against competing projects. These variables include contract duration, time since the last review, the number of existing suppliers, current supplier performance, supplier competitive positioning & so on. The supplier savings analysis is the filter on which all these variables are considered to provide an assessment on where each project sits relative to each other. 

Benefits of a cost savings analysis

Conducting a supplier cost savings analysis puts every expense reduction opportunity onto one page & by extension forces decisions to be made on how many projects to undertake & in what order. But the benefits of conducting a savings analysis extend beyond project prioritisation & include the following-

· Identify the total ‘size of the prize’ savings available from your supplier base.

· Identify opportunities for immediate ‘quick wins’ savings through direct supplier negotiations or cost optimisation.

· Understand the savings opportunity, probability of success & anticipated timeframe within each project.

· Quantify how many projects are of suitable value that they are worth pursuing.

· Assess the expected timeframe to achieve targeted savings objectives.

· Assess the required resources to undertake the targeted projects.

Conclusion

Conducting a cost savings analysis is a critical process to ensuring cost savings exercises achieve project targets with efficient use of resources. A cost savings analysis provides a roadmap of future supplier cost savings projects & if done correctly, should be a strategic document that can be used over multiple years.