Understanding Soft Costs vs. Hard Costs and Measuring Procurement Savings
Hard cost savings are the tangible and measurable savings that are realized from specific procurement processes. This type of cost saving can usually be calculated easily in monetary terms and measured on a dollar-for-dollar basis. Some examples of hard cost procurement savings include the following:
- Negotiating better pricing structures with suppliers: Analyze your current supplier contracts, gather market intelligence on pricing trends, and leverage this information to engage in meaningful negotiations with your suppliers.
- Lowering transportation costs: Consider consolidating shipments, optimizing routes, and using freight optimization software to reduce costs and improve efficiency throughout your transportation network.
- Reducing storage fees: Identify slow-moving or obsolete items and implement strategies like just-in-time inventory management, vendor-managed inventory, or consignment arrangements to minimize storage requirements and associated costs.
- Optimizing production processes to reduce waste: Implement lead manufacturing principles, such as value stream mapping and continuous improvement initiatives and eliminate non-value-adding activities to streamline your operations and reduce waste.
Typically, hard cost savings are your organization’s most visible and immediate benefits from its procurement initiatives. Measuring these tangible results is easy because they can be tracked directly through invoice and purchase order data. Your procurement team can use this data to calculate precise amounts of hard cost savings that have been achieved.
What Are Soft Cost Procurement Savings?
Soft cost savings, on the other hand, are less tangible benefits that your organization can achieve through its procurement processes. These benefits may not be as immediately apparent or quantifiable, but they still add value to your organization over time. Examples of soft cost procurement savings include:
- Improved customer service: Focus on enhancing communication challenges, implementing customer feedback systems, and investing in customer service training to ensure the prompt and effective resolution of customer inquiries, complaints, and issues to improve customer satisfaction and loyalty.
- Increased supplier responsiveness: Foster proactive and transparent communication with your suppliers, establish clear performance expectations and leverage technology solutions for efficient order processing, supplier collaboration, and issue resolution. This will enable faster response times and smoother interactions between your organization and its suppliers.
- Enhanced supplier relationships: Establish regular performance evaluations, mutual goal-setting, collaborative problem-solving, and joint value creation initiatives with your suppliers. By cultivating open and trusting relationships with your key suppliers, you can foster long-term partnerships and unlock additional value through innovation and continuous improvement.
- Improved quality of products: Utilize supplier quality audits and rigorous testing protocols to ensure adherence to industry quality standards. Establish clear quality control processes and work closely with your suppliers to ensure consistency.
Soft costs can be difficult to track because they may not show up as clearly on invoices or purchase orders. To accurately measure soft costs, you need to look beyond traditional metrics like total spend and instead focus on how your procurement processes have impacted customer satisfaction levels, supplier performance, and overall quality standards. You should also track customer feedback through surveys or use other qualitative methods to measure these types of intangible results.
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How to Measure Cost Savings in Procurement: 4 Key Steps
In order to effectively measure both hard and soft costs in your source-to-pay operations, you should keep in mind the steps outlined below.
1. Identify Target Areas for Improvement
Begin by assessing your current procurement processes and identify areas where you could save money or optimize your operations. This may include reducing transportation costs, improving vendor performance, increasing inventory turns, or improving service levels (like on-time delivery). Be sure to include both tangible measures of savings as well as intangible goals.
2. Analyze Existing Data
Collect all existing purchasing information from your ERP system or other tracking system and analyze it for patterns or trends that could help you identify opportunities for savings and cost avoidance. Look for discrepancies between budgeted vs. actual spending in various categories, such as material costs or labor expenses. This will help you quickly spot potential areas where you could negotiate better prices with suppliers or implement other efficiency improvements.
3. Implement Changes
Once you’ve identified potential areas for improvement, create an action plan for implementing changes within your organization’s procurement activities. This may include negotiating better pricing with suppliers, pursuing strategic source opportunities like buying in bulk, or streamlining procurement processes with automated technology solutions. If possible, track your progress against key performance indicators (KPIs) and industry benchmarks to ensure that you achieve your desired results over time.
4. Measure Results
Finally, evaluate the impact of your changes by measuring soft costs vs. hard costs before and after implementing changes. Use quantitative techniques, such as invoice or purchase order analyses, to assess hard costs and qualitative measures, like customer feedback surveys, to determine soft costs. This will allow you to determine if you achieved significant procurement cost savings and whether further optimization efforts will be necessary to improve financial performance down the road.
Achieve Procurement Savings With Expert Support from Velocity
At Velocity Procurement, we’re dedicated to providing you with the support you need to propel your cost-saving initiatives to new heights. From unlocking hidden efficiencies and slashing expenses to revolutionizing supplier relationships and enhancing customer service, we have the expertise you need. Don’t settle for partial savings—contact us today and let us guide you toward procurement savings.