Cost avoidance
Cost avoidance prevents future costs that would otherwise occur, such as negotiating to hold prices flat when suppliers request increases, or selecting suppliers that won't require future remediation. Unlike cost reduction, avoided costs don't appear as savings against prior spending since the higher cost never actually happened.
Examples
Price increase negotiation: A supplier requests a 5% price increase citing higher material costs. Procurement negotiates the increase down to 2%. The 3% difference is cost avoidance, preventing $150,000 in additional annual spend that would have occurred.
Specification optimization: Early in design, procurement identifies that a proposed specification would require expensive custom materials. Modifying the specification to use standard materials avoids $500,000 in annual material cost that would otherwise have been designed into the product.
Risk mitigation: Procurement identifies financial instability at a key supplier and qualifies an alternative before problems occur. When the original supplier fails, the prepared backup prevents production disruptions and expediting costs that would have occurred.
Definition
Cost avoidance is real value but challenging to measure and communicate. There's no invoice showing what you didn't pay, making cost avoidance more subjective than cost reduction. Organizations sometimes dismiss cost avoidance as "soft savings."
Documenting cost avoidance requires capturing what would have happened without procurement intervention. For price increases, document the requested increase and the negotiated outcome. For design decisions, document the avoided cost path and the chosen alternative.
Cost avoidance can be more valuable than cost reduction because it prevents costs from entering the baseline. Once a higher cost is established, reducing it later requires additional effort. Avoiding the increase in the first place is more efficient.
Balanced procurement metrics should include both cost reduction and cost avoidance. Focusing only on reduction against prior spending misses significant value from preventing increases, and may even encourage accepting increases to create future reduction opportunities.
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