Post-Cyber Monday Reflections — Shifting from Spaving to Saving

Cyber Monday

Well, Black Friday and Cyber Monday are over, and we have a $6 billion hangover to show for it. But, hopefully the money was well spent on a gift for a loved one or someone in need.

And most importantly, we got an excellent deal on it! Forget the fact we spent 4 hours fighting the crowds or scouring the web. Forget the fact that the ridiculous list prices were set by a hallucinating clown and a dart board. Forget the interest charges that many will likely pay next month. Forget that your low-priced supplier may not be accepting your returns 31 day from now. You got that endorphin rush and your goodies are on their way.

You, my friend, are a spaver extraordinaire.

To save means you need to spend. So, you spent, and you got 75% off all the way to the poor house. Money does seem to burn a hole in the proverbial pocket, doesn’t it? USA Today just wrote an article on this, and a financial advisor interviewed in the article makes the right point about how people don’t bank their savings, but spend them. In cost accounting terms, a favorable price variance is negated by an unfavorable volume variance.

You probably know where I’m going with this. In the business world, procurement can be locked into the world of spaving when their goals are driven so heavily by savings, which are calculated by favorable price savings multiplied by volumes. More spaving means more procurement folks getting bonuses. Less volumes means less savings for procurement to take credit for, and less than 20% of procurement organizations get credit for consumption reduction anyway. (How’s that for a perverse measurement system?)

Of course, it’s the budget owners’ responsibility to spend within budgets, and they do — all the way down to zero. They spend down to zero because of “use it or lose it” policies that our recent research has indicated is roughly 15% of total supplier spending. This keeps procurement hoping to negotiate end-of-quarter deals — every Friday at period-end is a Black Friday, of sorts. This dysfunctional spend mismanagement policy of institutionalized waste actually comes from finance.

Luckily, you are all savvy procurement folks and being the valued financial advisors that you are, you will try to partner with your finance counterparts. But if you can’t change use it or lose it, you’ll be able to work with your stakeholders to make sure that they are putting any surplus funds to good use, such as extending a contract duration or adding in specific deliverables with strategic suppliers to fund some innovation activities. And if you do it right, you’ll have this discussion during planning and budgeting so that you can plan your spending better and get more value from your spend rather than just spaving it.

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