Factoring Savings Calculations: How Do You Factor Cost Avoidance Into Your Savings Model? (Procurement Foundry Special)

Knowledge is power!

When I recently discovered Procurement Foundry I tapped into an incredible wealth of knowledge, expertise and insight that anyone in procurement, supply chain, and logistics will find informative, thought provoking – and yes, empowering.

Here is an excerpt of an article by Michael Cadieux, in which he tackles head on the controversy that is cost avoidance.

“Don’t insult yourself, or your CFO, by reporting on cost avoidance.”

Tania Seary wrote the above in a 2016 article indicating that ISM CEO Tom Derry shared the same opinion regarding the measurement of cost avoidance.

Here we are in 2019, and I am surprised that cost avoidance measurement is still a debate.

Now before you bring out the pitchfork and torches, hear me out on this one.  

The David Copperfield Effect  

As one of the most famous magicians of all time, David Copperfield is a master of illusion. Witnessing his “now you see it, now you don’t” mastery of taking something and making it disappear into thin air is nothing short of amazing.

Do you know what else is amazing? The way that cost avoidance takes something and turns it into nothing.  

However, if you miss the first part of the trick and only come in at the end when Copperfield goes ta-dah, it’s disappeared; you would likely say “ta-dah what?” The reason for your lack of recognition is that you never saw “the before” – the thing he made disappear.

With cost avoidance, it is the same thing. While we in procurement have the benefit of seeing the trick materialize from start to finish, i.e., we negotiate a supplier down from a 20 percent price increase to 10 percent, no one else in the organization is there to witness that accomplishment.

Like trying to explain the Copperfield magic to someone who isn’t there to see it first-hand, it loses something in the translation. Think of a tree falling in a forest and no one being there to hear it.

Use the following link to read the rest of this article, and while there, check out the many other interesting articles and resources on the Procurement Foundry site.