A procurement savings baseline is a reference point used to measure cost savings achieved through procurement activities. It is typically established based on historical spending data, market benchmarks, or projected costs without any current procurement interventions. By comparing the costs after procurement intervention to the baseline, organizations can quantify the savings achieved through various procurement initiatives, such as supplier negotiations, bulk purchasing, process improvements, or strategic sourcing.
The by defining the baseline before the sourcing event starts, procurement, finance and the business can all agree on how the success of the event is going to measured.
| Methodology | Description | Common Finance Objection | Category Example |
|---|---|---|---|
| Historical Price | Uses historical pricing to identify last price paid of weighted average baseline | Not visible in budget for many categories because of environmental, buyer behavior or corporate policies | Direct Materials, Corrugated Containers, Janitorial Services |
| Mark-up/Discount | The negotiated portion of spend is a multiplier of cost. | There is no control of the price of the underlying good or service | Temporary Labor |
| Market Basket | A representative sample of SKUs by spend, locations and volume | Only a small number of items have a known price and other items could offset savings. | Office Supplies, General Industrial |
| Index Adjusted | A government or industry index is used to define the market conditions over time. | Changes in the market can create procurement savings or pressures that aren’t visible in the spending. | Metals, Petroleum Products, Energy |
| Average of Top “X” | Average of top “X” bids. | Initial bids are poor substitutes for market prices. Final offer sets the market price. | Any new product or service |
| Sole Source | Using a non-final bid as a baseline with no other valid bids. | The baseline can be gamed by a high opening bid. | Any |
| Budget | Using previously defined budget | Finance rarely has an objection. | Capital, Any previously budgeted spend. |
