Product details

By continuing to use our site you consent to the use of cookies as described in our privacy policy unless you have disabled them.
You can change your cookie settings at any time but parts of our site will not function correctly without them.
Management article
-
Reference no. SMR51207
Published by: MIT Sloan School of Management
Published in: "MIT Sloan Management Review", 2010
Length: 9 pages

Abstract

For most companies, the single largest cost category is the total spend with suppliers. However, figuring out how to identify the best areas for supply savings - and then how to measure and report them - presents major challenges. Both understatement and overstatement of supply savings gaps signal the wrong reality, leading to an overemphasis on low-yielding cost saving initiatives, misdirected corporate resources and employees being rewarded for the wrong behavior. Moreover, supply savings gaps conceal the strategic contribution suppliers can provide. In studying the supply management practices at 30 large North American and European companies, the authors identified a variety of measurement and reporting practices for supply savings. They conclude that correct measurement of supply savings is almost impossible and that there are frequently gaps between reported savings and reality. They explore why gaps exist, what practices lead to under - and overstatement of savings, the consequences of poor supply savings measurement and what can be done to recognize supply savings gaps. To overcome the measurement and reporting challenges, the authors recommend that executives do three things: (1) focus on the total cost of ownership; (2) categorize the different types of savings; and (3) hardwire savings to the budget.

About

Abstract

For most companies, the single largest cost category is the total spend with suppliers. However, figuring out how to identify the best areas for supply savings - and then how to measure and report them - presents major challenges. Both understatement and overstatement of supply savings gaps signal the wrong reality, leading to an overemphasis on low-yielding cost saving initiatives, misdirected corporate resources and employees being rewarded for the wrong behavior. Moreover, supply savings gaps conceal the strategic contribution suppliers can provide. In studying the supply management practices at 30 large North American and European companies, the authors identified a variety of measurement and reporting practices for supply savings. They conclude that correct measurement of supply savings is almost impossible and that there are frequently gaps between reported savings and reality. They explore why gaps exist, what practices lead to under - and overstatement of savings, the consequences of poor supply savings measurement and what can be done to recognize supply savings gaps. To overcome the measurement and reporting challenges, the authors recommend that executives do three things: (1) focus on the total cost of ownership; (2) categorize the different types of savings; and (3) hardwire savings to the budget.

Related