A very simple excel sheet cost reduction tracker with 14 Headings used to help you track cost reduction and savings initiatives.
You can create a cost reduction tracker for free it might take 5 or 10 minutes but for busy professionals, this is five minutes wasted that could be used when you need to save precious time when managing several projects or contracts.
The tracker is suitable for contract management savings initiatives. ( assume that contracts are in place) although an RFI is used this is to gather intelligence and not used as a traditional PQQ (i.e. suppliers are not being pre-qualified) some suppliers may be resistant to filling in more forms and moan about procurement paperwork. If required go through the questions as part of the regular service review meeting.
Most companies spend a lot of time and effort preparing a tender sometimes with a big project team, but once the contract is signed the benefits are not measured. Kick start your continuous improvement initiative with key suppliers and use the spreadsheet to track high-level progress.
Why use a cost reduction tracker?
Some organisations might argue that they don’t need to track savings because they don’t negotiate and automatically accept the lowest tender price, or savings is less important because the price should not override quality. This is an incorrect view, though the quality is very important it doesn’t mean we shouldn’t get the best price available, this can be in the form of cashable savings or tracked as a cost avoidance. All value that you are able to achieve should be captured.
Let’s talk about cost
I will quickly glide over manufacturing. Cost is comprised off:
- Raw materials
The supplier profit is not a cost though it is a component of the final price.
Cost can further be split out into:
Direct cost- driven by how the product is made such as type of paper for a book
Indirect cost such as overheads, labour, administration.
Some cost will be fixed. For example, rent will be the same regardless of volume sold. Some cost is variable, for example producing in larger quantity might lower cost because of economies of scale.
Procurement professionals might want to understand the cost structure to determine whether if there is room for price negotiations
Understanding cost units mean you might be able to negotiate on specific components or compare supplier cost broken down into units. Price can be made up of different elements. Delivery, support, maintenance, defects, training, handling cost, commodity price, defects, risk.
Knowing the cost and profit allows you to negotiate a sensible amount. If supplier margins are eroded too much the quality side might not be as good.
Cost can be calculated in different ways.
Marginal cost is calculating the cost of producing additional units and the saving made if these additional units were not included. The marginal cost of an item is its variable cost. …Marginal costing is the accounting system in which variable costs are charged to cost units and fixed costs of the period are written off in full against the aggregate contribution.
Absorption costing is the total cost of producing products. a method of calculating the cost of a product or enterprise by taking into account indirect expenses (overheads) as well as direct costs.
You can read about markup and margins in more detail
The point at which production cost equals the selling price with no profit or loss. You can get a blank breakeven template here