Cost Savings - Are Your Organization's Discounts Real?

"Cost savings" is a loaded term that means different things to different people and to different organizations. While one organization may consider a cost savings something that is measurable, another may view cost savings based upon 'productivity' increases. One individual may consider it a cost savings when they buy items that are on sale, regardless of necessity, while another may consider rebates and 'cash in hand' deals as the only real savings.

Cost savings can be calculated, or not, as the case may be, but knowing when a cost savings is 'real' as opposed to invented, is necessary if an organization wants to be sure that they have reduced costs.

One of the ways organizations claim 'savings' is by pointing out 'discounts' that they receive from various suppliers. Suppliers aren't ignorant about this and make sure to create in the minds of the purchaser, that they are getting the best deal possible. Hence, they give out "discounts'.

Now one might take issue with this given that it is being suggested that discounts are not real and that an otherwise competent organization is being "fooled". Nothing could be further from the truth right? Almost every organization that we have ever met with has insisted that they "run a tight ship", "have very competent people", "have a handle on things", "we hire the best", "we know all of our costs", etc. Essentially every buzz word or term is used to indicate they can"t possibly get any more effective in cost management.

One of the first things pointed out to us is: we get discounts from our suppliers - as if this is not given to other organizations. The question is: Discount off what? A 40% discount doesn"t mean anything if it is off a list price that nobody pays anyway.

One organization we worked with indicated that the 33% discount we had secured for them for a series of products was not as good as their 40% discount. Presumably 40% is better than 33%. Should be obvious, right? When it was indicated to them that our 33% discount was off their current rates while their own "discount" was off a list price that no one, not even an individual off the street would pay, they began to see the light. Our 33% discount, by using their measuring stick, was actually 60%!

Incidentally, this 33% savings (or 60% depending how it is measured)! Amounted to approximately $100,000! This level of savings across several more non-core expenses will obviously add up. Savings in the millions of dollars for large corporations is definitely achievable.

The point is: discounts are meaningless if they are not compared properly and if they are measured off a list rate that is never paid by anyone!

• Is your organization measuring cost savings by discounts?
• If so, are these discounts off "real" prices or "list" prices?
• What is your competition paying?
• Are you paying more now that last year?
• How do you know?
• Does your supplier routinely tell you how much you saved?
• If so, how is this measured?
• Are the savings real or manufactured?

Take a look at vendor and supplier pricing for a variety of goods and services and see if there are "discounts" provided. You"ll be surprised how many suppliers use this as a way to convince you that you are "saving" money.

But, are the savings real? Are they legitimately measured off "real" prices that others pay but you don"t?

Don't be fooled by artificial cost savings off concocted discounts. Know the facts.