Procurement Value - A Penny Saved
Benjamin Franklin said, "A penny saved is a penny earned". True indeed, but the common problem faced by CPOs has always been - How to define a "saved penny" or "Procurement Value" as few call it.
Traditionally, getting the price reduction from suppliers was the only objective of the procurement organizations. Hence measuring Procurement Value was only based on material cost reduction. The most basic method is to use the difference between the current price and last year's price and multiply it with quantity received. Simple as it may sound, things get complicated in case of non-repeated buy items or items which are not comparable to items bought last year. In such situations, the saving is calculated by taking the price from initial rounds of quotation as base price v/s the final negotiated price. This is where things get trickier and various "games" are played among the suppliers, end users, buyers and financial controllers. Even though companies have well defined policies and methods to determine a baseline price/budget cost or take the lowest initial bid and compare these with the final negotiated price to arrive at a saving calculation, this calculated dollar figure is a very narrow metric to measure the overall Procurement Value. There is a lot of value which doesn't get measured and is often subjective in nature. Over a period of time, the role of procurement function has evolved to control this subjective procurement value. Buyers are not only just issuing purchase orders but also playing the role of planner / inventory controller to ensure security of supply. Apart from running RFQ events, Sourcing Managers are using their commodity expertise and market knowledge to reduce Total Cost of Ownership (TCO) and Procurement General Managers are becoming a trusted business partner and change agent for business units.
The procurement value is now reflected in both the effectiveness and the efficiency of acquiring goods and services. Economic value added (EVA) is a good measure of procurement value which gets linked to revenue earned or gross/net margins of the firm. Procurement led patents creation also gets included in such EVA/procurement value. While the saved penny is important, the process of saving and defining it in the right manner is equally vital.
So, have you saved your Penny today? Please share your views.