Cost Savings: A true savings will mean that the stakeholder will spend less than they did in a prior year due to Purchasing’s value contribution. If there is a difference in previous price paid to new negotiated price (lower), this difference is the savings.
Cost Avoidance: Another form of cost avoidance is expediters calling suppliers to obtain pricing when placing an order under their purchasing limit and in the process requesting a discount. The discounted price obtained is a cost avoidance as had it not been requested, we would have paid the higher price. Cost avoidances often need to be requested. Reductions for multi-unit orders achieved through order consolidation or discounts for processing orders prior to the effective date are other forms of cost avoidance.
Internal: These amounts are generated through some internal change within Purchasing. These amounts only impact our unit. These amounts are usually the result of process efficiency and other improvement projects.
Multi-year: When a multi-year agreement is entered into that has savings /avoidance across the number of years it will be in place, only the first year-over-year is associated as true savings. This is because departmental stakeholders only recognize what is different from one year’s budget to the next, at which point the new budget becomes the expectation. Please refer to the Calculation Basics diagram above for calculation of the amount.
Revenue Enhancement: Benefit achieved when procurement results in revenue generation. Examples: sales of obsolete equipment, new income generated, intellectual property development with suppliers.