Introduction

The topic of savings in business procurements has become very popular during the time of global crisis in the years 2008-2010. Business owners and company management boards started to particularly observe the expenditures connected not only with th employment, but also  procurement. Many projects targeted at reduction of procurement costs were launched and the business results of actions of this type were calculated in a natural manner. To this day, the subject of savings in procurements, and in particular the methodology of calculation of these savings is one of the most complicated and controversial issues in practice and literature of the subject.

Definition

Savings in business procurements are the deviations between the basic value understood as the starting or reference point, and the target value, which is the result of the implemented procurement activities. This value can be the price, but also other components connected for example with the TCO concept (operational parts, service, consulting, process costs, etc.). While there are usually no problems with determination of the target value in practice, the subject of the basic value is problematic and disputable. Nevertheless, the basis for implementation of effective activities oriented at generation of savings in procurements is the determination of the methodology at the level of the enterprise/capital group, including the definition understandable for all entities involved in the implementation of activities.

Procurement projects

Activities oriented at savings do not usually constitute typical and regular procurement activities oriented at maintenance of continuity of the enterprise operation. Cost-saving projects definitely have a special nature and they are more like consulting activities than the standard process. Thus, the projects should be implemented not only in situations of occurrence of the procurement needs, but mainly they should result from the savings implementation plan in the enterprise or constant search for sources of these savings. The methodology of works of this type is cost- and time-consuming, but in practice it usually brings measurable benefits. It also requires the appointment of a position responsible for searching for savings or/and for utilizing the service of specialized consultancy companies.

Basic value

The basic understanding of savings concerns of course the category of price, but already in this case the subject can be complex due to its various components. In case of one-dimensional projects where everything can be put down to price, one should assume a reference point, which can be:

• the currently paid price
• the best trade offer in response to an offer inquiry
• the market price understood as for example an average price from the collected trade offers
• the trade offer of the supplier, the offer of which will be selected
• the typical price on the market
• the budget price
• the price understood as a purpose

Of course, different understanding of the basic price will influence the level of savings, which however does not seem to be a serious problem. From the point of view of the analysis of the obtained results, much more important is the understanding of the indexes and their comparativeness in longer periods of time.

Special offers

When determining the basic value for calculation of savings and based on the current price, one should take into account that there are special prices on the B2B as well as the B2C market. Taking advantage of such a special offer can cause problems in the future in the calculation of savings, if we assume such a low price as a reference point. In similar situations the merchant as well as the person performing the subsequent analysis should be aware of the fact that the price is not a market price, and should not be the basis for calculation of savings in future procurement projects.

TCO and value analysis

The matter of savings calculation becomes complicated in case of the use of the TCO model or analysis of the value in the performed procurement projects. In such cases, in addition to the price, one should take into account also other key components affecting the costs connected with possession of the product. In the case of using the TCO concept, the basic value should be defined for all components of the costs, and then compared with the values obtained during the implementation of the procurement project. Calculation of savings in case of TCO is of course more complicated in practice, but using an appropriate methodology of calculation, it should not cause major problems. It is also worth mentioning that the reduction of some costs can be made through the increase of other components, but still the TCO analysis should concern the aggregated indicator. A more complex issue seems to be the analysis of values understood as a sum of all the values obtained by the client in relation to all the incurred costs. In case of the projects oriented at an increase of the value, it may turn out that the value increases even in the situation of increase of the costs or that the decrease of costs simultaneously reduces the aggregated value.

Savings in e-procurements

In case of the use of electronic procurements, the methodology is similar to traditional procurements. In many cases, the basic price is the best offer in response to e-rfx or the best offer of the supplier, who was later selected in the course of an e-auction. Of course, the electronic systems automatically calculate the savings for implemented procurement projects, which is a significant convenience and it provides some interesting analytical materials.

Discussions and controversies

 As already mentioned in the above article, the topic of savings in procurement is very disputable. Various enterprises approach this issue with the assumption of various methodologies or philosophies. You may find an approach where the companies do not calculate savings, but only concentrate on assurance of efficiency and effectiveness in procurement actions, as well as approaches where the reports and calculations of savings are the basis. However, the most difficult issue connected with savings is not only the results themselves, but their interpretation and learning lessons for further actions. At the same time, the issue is connected with the matter of evaluation and remuneration of the people responsible for the implementation of procurements, but this is an issue for another article.