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The impact of cost savings on profitability

A study by Kluge (1997) suggested that cost savings achieved through e‑procurement 

may have a significant effect on profitability. Activity 7.2 illustrates how the savings will 

vary between companies according to their buying characteristics. The largest savings and 

impact on profitability will typically be for manufacturing companies 

in which procurement is a major cost element and there are many req‑

uisitions for relatively  low‑  value items. Service industries have lower 

potential for savings. The consequence for this is that there will be a 

wide variation in potential savings according to industry, as illustrated 

in Table 7.3.

To conclude this Focus on topic, a note of caution should be struck. 

Many of the models used to calculate savings and return on investment 

are, of course, only as good as the assumptions they use.

Estimating e‑procurement costs

Focus on

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Chapter 7  E‑procurement

Activity 7.2

Modelling cost savings and profitability arising from e‑procurement

Purpose

To explore the different characteristics of purchasing in organisations that will govern 

the scale of savings made through e‑procurement.

Activity

Imagine you are a procurement manager, IS manager or consultant who needs to 

demonstrate the cost savings of e‑procurement to a senior management team in order 

to obtain approval for investment in an e‑procurement system. Develop a spreadsheet 

model for each of two hypothetical companies to demonstrate the case as follows: