Educational Procurement Journal - March 2008 - (Page 10) but they are a valuable tool. For the purpose of calculating total savings, the following four steps project the estimated annualized total cost savings for each active contract. (Note: We use the example of calculating contract savings; however, the same methodology can be applied to individual transactions.) For each contract or sourcing transaction, the date range must be compared against the range of the reporting period (typically a fiscal year or a calendar year) to determine the proportion of time within the reporting period that the contract or sourcing transaction was active. Some measurements may contain two entries, indicating that a contract expired and was renewed within the specified reporting period. The savings associated with each entry will likely be different, which reflects both the previous and renegotiated contract savings. 10% Vendor A (old) 5% Vendor A (new) 3% Vendor B Jan June 2. Total Spend: Total supplier spend reports . are run for all contracts or sourcing transactions that were active at any time within the reporting period to calculate the total discounted spend with each supplier. 3. Cost Savings: The individual contract or sourcing transaction savings percentages are calculated as outlined previously and repeated below. (Average of Nonawarded Bids – Awarded Bid) = Savings [Last Buy Price x (1 + % ∆ CPI)]– Awarded Price = Savings 4. Total Savings: A weighted average is then used to approximate the total savings associated with each active contract or sourcing transaction for the reporting period. This approach provides a reasonable approximation of the total savings for all active contracts or transactions within the period. For multiple-year contracts, this concept accounts for the fact that pricing was held firm for the entire term or may include price increases, each of which are recorded for specified date-ranges over the life of the contract. Since the total spend reports identified in Step 2 above reflect the discounted amounts that were actually paid to suppliers, it is necessary to approximate the undiscounted spend in order to estimate the savings. The following calculation can be used to approximate the prediscounted spend within the period, which is then multiplied by the contract savings percentage to get a weightedaverage measurement of total savings for each contract. Pre-Discounted Spend for Period Total Savings = (Days Active / 360) * T Spend otal (1 – Cost Savings %) * Cost Savings % Dec Figure 1 – Contract A was renegotiated on May 31; therefore, it was initially active for 120 days @ 10% savings and then for 240 days @ 5% savings in this example. Contract B was active for the entire 360-day period @ 3% savings. The individual contract or sourcing transaction savings are then added together to arrive at an estimate of the savings for all active contracts or sourcing transactions within the period. (continued on page 13) WHAT YOU BOUGHT. THE PAPERWORK IT TOOK TO BUY IT. There is a better way. Let HGACBuy do the heavy lifting and satisfy the bid process for you. www.HGACBuy.org 10 EDUCATIONAL PROCUREMENT JOURNAL 1-800-926-0234 www.naepnet.org | March 2008 http://www.corriganmoving.com http://www.HGACBuy.org http://www.naepnet.org
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