You might reasonably ask: Why make procurement cost reduction a priority?
Consider the following illustration. Let’s take a typical company:
What happens if we can reduce material costs by just 5%?
If the same profit increase were to be generated by increasing sales, what level of sales increase would be required?
At the existing 8% profit margin:
Profit increase = New sales x 0.08
£115,000 = New sales x 0.08
New sales = 115,000 = £1,437,500
0.08
1,437,500 = 28.8%
5,000,000
So in order to achieve the same profit increase generated by a 5% cost reduction, this company would need to increase sales by 28.8%! Consider the cost and effort required to achieve such a sales increase? |
