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Cost Avoidance

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Faisal Shabbir
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19 views11 pages

Cost Avoidance

Uploaded by

Faisal Shabbir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Cost

Avoidance

Saad Bin Majed


Saad Bin Majed

Cost avoidance is the


Cost strategic preservation of
existing spending levels to
Avoidance prevent price increases
Definition stemming from inflation,
economic shifts, or
escalating costs of
products or services. It
involves reducing
expenditures through
procurement initiatives
when contrasted with what
would have been spent
without procurement
engagement.
Saad Bin Majed

Cost Avoidance Calculation


The Key
Savings = Projected Cost of
Strategies for Inaction - Cost of Proactive
Measuring Cost Solution.
Percentage = Avoided Cost /
Avoidance in Cost of Inaction
Procurement Compare Initial and
Accepted Offers for Insights

Rejected Price Increases


Measure variance between
projected and actual spending
post-negotiations

Benchmark Method
Use external benchmarks for
price evaluation and reliability.
Saad Bin Majed

Budget Comparison
The Key
Strategies for Compare budgeted figures with
actual expenditures for credibility.
Measuring Cost
Resource Prioritization
Avoidance in
Allocate resources to high value
Procurement projects, lower priority for projects
without business cases.

Proposal Differences
Based on the report of price
comparison among suppliers'
offers.
Market Variability
Understanding budgeting
practices helps manage
discrepancies effectively.
Saad Bin Majed

Approach
Cost Avoidance: Proactive planning
to prevent future expenses.
Cost Cost Savings: Reactive focus on
reducing current expenditures.
Avoidance vs.
Financial Impact
Cost Savings Cost Avoidance: Indirect impact on
Comparison operational efficiency.
Cost Savings: Direct changes
reflected in financial statements.
Cost Classification
Cost Avoidance: Differentiation between
tangible and intangible expenses.
Cost Savings: Focus on tangible cost
reductions versus intangible benefits.

Time Horizon
Cost Avoidance: Predictive of
future savings through investments.
Cost Savings: Immediate actions
aimed at reducing expenses.
Saad Bin Majed

Data Source Costs


High subscription costs can restrict
access to crucial monitoring information.
Consultant Data Value
Insights with Data from consultants aids major
negotiations but may not be necessary
External for routine reports.
Commodities Benchmarks
Benchmarks Effective for tracking cost avoidance,
notably in commodities.

Price vs. Market Average


Crucial for evaluating commodity prices;
below-market increases indicate savings.

Objectivity in Benchmarks
A reliable way to measure cost avoidance,
though finding true benchmarks is challenging.

Budget Forecast Method


Compares budgeted amounts to actual
spending; accuracy is vital for
effectiveness.
Saad Bin Majed

Link to Procurement
Involvement
Reports should directly link cost
Credibility of avoidance to procurement for
credibility.
Cost-
Defined Measures
Avoidance Essential for gaining respect and
Reports trust in procurement.
Subjective Reporting
Precision in financial contributions can
raise questions.

Utilizing Client Valuations


Enhances credibility by including
client valuations from business
cases.

Enhancing Credibility
Client valuations boost overall
credibility of cost-avoidance
reports.
Saad Bin Majed

Avoiding Unnecessary
Purchases
Navigating Emphasizes prudent procurement
to prevent unnecessary expenses.
Demand
Challenges Significant Cost Avoidance
Highlights saving opportunities
through strategic decision-making
and resource efficiency.

Reduction in Operating Costs


Demonstrates effective cost
avoidance strategies.

Demand Challenges for Cost


Avoidance
Buying less and improving
specifications to reduce spend.
Saad Bin Majed

Limited Negotiation
Selecting a supplier that may not
fully meet the company's
Challenges requirements.
of Cost Choosing a Single Supplier
Relying on only one supplier without
avoidance exploring alternatives can limit
competitive pricing and innovation.

Unprofessional Sourcing and


Procurement Process
Inadequate management of the
sourcing and procurement process,
including poorly defined requests,
can lead to inefficiencies.

Visibility of Cost Avoidance


Cost avoidance may not be evident
as a reduction in costs or properly
credited within the organization.
Saad Bin Majed

Boosts profit margins directly.

Streamlines operations and


saves time.

Benefits Enhances competitiveness


through lower prices.
of Cost Redirects funds to key areas
Avoidance like research

Mitigates financial and legal risks.

Cultivates a culture of sustained


cost savings.

Improves customer and employee


satisfaction.

Aligns with sustainable business


practices.
Positively impacts employee morale
and engagement
Stimulates innovation by
reallocating resources.
Saad Bin Majed

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