In a recent editorial piece over on Supply Chain Digest, the Editorial Staff asks if Procurement and Finance [can] Get on the Same Page in Measuring Savings from Supply Management Improvements. The article notes that a major challenge to this effort is the fact that procurement and financial managers are often talking a somewhat different scorebook. While procurement managers focus on savings as cash improvement, finance types tend to focus on profit and loss, and accrue all the while.
However, according to the article, the two don’t have to be fully reconciled for both departments to find common ground. All that is required is a common calculation that both departments can accept. According to the article, this calculation is:
Savings = Secured P&L + Deferred P&L + Mitigated P&L
Secured P&L = savings where favourable terms of purchase are acquired through changes in pricing, mix, demand, or quality
Deferred P&L = measure of the benefit delivered to the balance sheet for the current financial period (through capital purchases or pre-payment scenarios, for example)
Mitigated P&L = savings that come from agreements in which favourable terms of purchase are retained (cost avoidance)
Savings = Cost Reduction + Balance Sheet Improvement + Cost Avoidance
This is a good calculation, but I’m not sure balance sheet improvement captures all of the benefit supply management can bring. Is risk reduction (and minimized disruption costs) captured on the balance sheet? Is working capital optimization captured on the balance sheet? (And is procurement credited for reduced finance charges?) Simply put, the value of good Supply Management is:
Value = Cost Reduction + Cost Avoidance + Profit Improvement
Profit Improvement = Working Capital Improvement + Risk Mitigation + Capital Acquisitions + Market Share Improvement + ….