1. What is Procurement Value Reporting?

Value generation reporting is a requirement for any Procurement function

It’s also essential to support decisions on directing effort towards the activities that generate most value to the business.

It becomes our resource planner.

Procurement value is defined by Procurement-led improvements that allow getting more out of supplier expenditure, either by reducing consumption or total cost of ownership (TCO), or by increasing the utility of expenditure to better support stakeholder objectives and create strategic advantage.

I’ve written this guide to summarize the way that Procurement teams should measure value, covering savings calculations, reporting and the sign-off process,

I’ve also defined how value in its wider sense should be captured (value beyond hard savings).

We need to make sure all higher-value activities are recorded if we want to get credit for these and thereby build credibility and engagement.

The phases of effective Procurement Savings tracking are detailed below:

2. Savings calculation and reporting

There are many ways of calculating and reporting savings.

The approach I prefer to use balances rigor (making the numbers credible) and efficiency (not making an industry out of reporting).

A Saving = new total cost – old total cost

It should be measured against the most appropriate of the following baselines (depending on what has been included in the budget):

1. The price paid in the previous financial year

2. The last contract price paid adjusted by a recognised external index

3. The lowest technically feasible bid from a qualified supplier at the first tender submission is used as the baseline

4. A procurement informed budget agreed with the functional commercial finance lead

Rebates:

The saving may be claimed based on a reasonable and prudent forecast of future expenditure.

Actual savings must be reviewed/adjusted once the rebate becomes known and is paid.

Other incentives, credits, etc...

Suppliers may offer incentive payments or credits to secure renewal business or multi-year deals.

These should be ideally structured as credits (rather than cash flowing into the business account), or else used to negotiate a lower contractual price.

The savings may be claimed in line with the savings baseline calculations described above.

3. So, what isn’t a saving?

-  when there is no evidence that specific procurement intervention affected the TCO/savings outcome

-  exchange rate movement (unless proactively addressed contractually)

-  tracking a commodity cost

-  volume changes (reductions) unless created by efficiency actions (eg: working with operations to reduce the number of waste collection pickups)

4. What should we report on?

Savings reporting begins at activity level and aggregates upwards to Category and Functional reporting.

The key buckets reported on are:

-  Category and value of spend addressed

-  In the year savings (ITY)

-  Annual savings

-  The savings type as recognised by the business (opex, capex, cost avoidance, revenue)

-   Flow Through Savings (FTS) – 12 months of savings that span multiple years where we report the portion of savings applicable to the current reporting year

In the Year (ITY) Savings

Calculated from the effective date of savings benefit.

These can cross from one financial year to another, but you cannot report more than 12 months of benefit, unless there are incremental savings, where the additional savings can be recorded for 12 months from when the benefits start to deliver.

Non-recurring (one-off) savings only report in-year savings, not an annualised savings value,. E.g: a one-off rebate/credit.

Annual Savings

Based on the annualised (12 month) saving of the project at run-rate.

Only includes elements of the project which have a recurring saving (i.e. repeat year on year).

Savings are not reported beyond 12 months.

Total Lifetime Value

This number does not form part of standard reporting, but is tracked to help describe the total value opportunity of a project.

It should be based on the total saving expected over the life of the contract.

5. How do we allocate value?

Savings should be reported as either:

-  Profit Supporting - where savings are “baked into the budget” during the budget setting process – e.g: agreed savings target which adjusts the budget accordingly.

-  Profit Enhancing – savings realised but not captured up front with finance and will hit P&L

This will be tracked via an Activity Tracker by completion of an “In Budget” column.

Reporting of savings must reflect the actual savings that have been realized once a contract has been mobilized.

6. How should we report savings?

Each Procurement Lead should record the activities and corresponding savings, value type and status from pipeline idea through to completed project in the Activity Tracker.

Supporting information (savings calculations, assumptions, etc) should be retained against the project for future reference.

7. What are the different Value Types?

All activities should be categorized against one of the following Value types below. Value types 1-5 are readily quantifiable and reported monthly on the Procurement Dashboard. Value types 6-7 are tracked in terms of # of activities performed as well as documented in terms of broader value delivered (people, process, efficiency).

1.       Opex (Operational Expense)

2.       Capex (Capital Expense)

3.       Cost Avoidance

4.       Cashflow improvement

5.       Revenue

6.       Risk

7.       Governance

8.       Process Improvement

9.       New Strategic Sourcing

8. What about value beyond savings?

Varying greatly by Category, it’s not possible to attribute a hard savings number to a significant proportion of Procurement activities.

While sign-off and recognition by Finance is not appropriate, it’s important this effort is validated and captured to support the measurement of our full contribution.

Activities should be categorized into the following key categories in the relevant column of the Activity Tracker called “Value Tracking”, and brief details included and quantified where this is practical:

9. The sign-off process

A clear and defined process, aligned to the Finance budgeting process which engages the budget holder, Finance and Procurement is essential to recognizing and tracking savings delivery to build credibility in savings reporting.

Hard savings

Sign-off should be obtained by the project Procurement lead with the relevant Finance Business Partner and Budget holder, and stored in a project folder.

The Finance person who signed the savings off should be input in the “Finance Sign-Off” column of the Activity Tracker.

The Category Procurement lead can provide a summary on a monthly basis to the relevant Commercial Finance lead and senior functional stakeholder for visibility, and the Head of Procurement should provide a rolled up summary to the members of the Finance Leadership Team on a monthly basis.

Value beyond Hard Savings

For Value that is quantifiable but will not hit the budget (such as cost avoidance), the same process as hard savings should be used.

For initiatives that do not deliver a quantifiable saving, the Category Procurement lead should track these via the Activity Tracker “Value Tracker” column monthly, and obtain monthly sign-off from the Group Head of Procurement.

In a future article I will be going into far more detail about how to communicate and report the savings delivery effectively.

That’s it, that’s all your Savings reporting questions answered but please let me know if you have any questions.