How to Measure and Report Value
There are several ways to calculate savings. Align with your finance team on the applicable methodology before launching the sourcing event.
Savings Calculation Methodologies
- Historical Savings: New price vs. previously paid price (same specification, same volume). The most credible.
- Budget Savings: New price vs. budgeted cost. Often used when no historical contract exists.
- Market Benchmark Savings: New price vs. market average/median. Useful for new categories.
- Cost Avoidance: Preventing a price increase (e.g., supplier proposes +8%, negotiated down to +3%). Real but harder to validate - document the supplier's initial proposal.
- TCO Savings: Improvements in quality, logistics, inventory, process costs. The most comprehensive but requires data.
⚠️ Savings Integrity: Never double-count savings. If you report €100K in savings on a category, those €100K must be reflected in the P&L or traceable to a specific cost line. "Paper savings" that don't show up in the financial results destroy procurement credibility faster than anything else.
💡 Best Practice: Report savings from multiple angles - historical, budget, and TCO. Let finance choose which one to publish externally. Always present the methodology alongside the number.