Minding the Supply Savings Gaps

This is an MIT Sloan Management Review article. 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: Focus on the total cost of ownership; categorize the different types of savings; and hardwire savings to the budget.

• Operations strategy
• Finance and investing