When procurement savings increase total cost: a worked example and supplier comparison sheet

Purchasing finds another supplier for the same part. The specification matches, the quote is lower, and the order saves €200. The saving goes into the monthly report.

Then the delivery is late. Production needs the parts, logistics books an express shipment, and another €350 leaves the company. It lands in the freight budget, so the purchasing report still shows a saving.

Both reports can be correct. Together, they describe a company spending €150 more.

The buyer may have done exactly what the target rewarded. That's what makes this worth looking at. If success ends at the purchase order, the costs that follow can disappear from the decision that created them.

Follow the order, not the department

Here's that story as a purchase order. A factory needs 1,000 parts, to the same approved specification and required delivery date. Supplier A would charge €5 each. Supplier B quotes €4.80. Both normally cost €100 to deliver.

For this fictional order, A would arrive on time. B is late, and express transport costs €350 more than the normal freight charge. It gets the parts there before the line stops. There is no downtime or quality loss in this example.

Cost for the same 1,000 parts	Supplier A	Supplier B
Parts	€5,000	€4,800
Normal freight	€100	€100
Extra freight to recover the late delivery	€0	€350
Total for this order	€5,100	€5,250

The €350 matters because it is an extra cost. If it were the whole express freight bill, replacing the normal €100 shipment, the extra cost would be €250. The net saving would then be −€50. Mixing total bills with additional costs is an easy way to get this comparison wrong.

A bad result does not settle the supplier decision

That order cost more. But before placing it, nobody knew for certain that it would be late.

Choosing suppliers means comparing what is likely to happen across future orders. Judging the result means checking what actually happened. Those need different numbers.

Suppose the same factory buys 12 identical orders a year. A costs €5 a part, B costs €4.80, and normal freight stays at €100 per order. For this second fictional example, assume A needs no express shipments. Each shipment B needs adds €350.

B's express shipments in a year	Annual price saving	Extra freight	Net annual saving versus A
0	€2,400	€0	€2,400
2	€2,400	€700	€1,700
6	€2,400	€2,100	€300
7	€2,400	€2,450	−€50
12	€2,400	€4,200	−€1,800

With these assumptions, B can still be the better choice despite occasional express freight. At seven shipments, the price advantage is gone. If A also needs express freight, compare the difference between the two suppliers, rather than charging every exception to B alone.

That is the useful question before signing: how much additional cost can this price saving absorb, and what evidence says we will stay below it?

Put the missing costs beside the quote

The broader method is called total cost of ownership. CIPS includes the purchase itself, delivery, use and end-of-life costs. For this part, start with the costs that could actually differ between suppliers.

Download the supplier comparison sheet →An editable Excel workbook with the €150 order example, the annual comparison and a freight sensitivity table. Replace the fictional assumptions with your own figures.

The annual comparison starts with these inputs:

Input	What to put in it
Annual quantity and order size	The same demand for both suppliers, allowing for real minimum order quantities
Unit price and normal freight	Quotes on the same currency, delivery terms and destination
Expected express shipments and extra cost each	Comparable delivery history or explicit low and high estimates
Quality and handling costs	Additional inspection, sorting, rework and unrecovered scrap costs
Inventory carrying cost	Annual cost of extra average stock, not the full value of the stock
Other costs and supplier credits	Switching costs, duties, disruption costs and recoveries, each counted once

The workbook calculates purchase cost plus those costs, less credits. It then compares B's expected annual total with A's. Its zero values for quality, inventory and other costs are assumptions for this example, not claims that those costs never matter. Its fractional express-shipment inputs represent annual expectations, not actual shipment counts.

Agree the delivery and quality requirements first. A supplier that cannot meet an essential requirement should not win because a spreadsheet makes it look cheap. CIPS makes the same broader point in its supplier evaluation guidance: assess price alongside capability, capacity and quality.

For a new supplier, there may be little reliable history. Use a trial and show a range. A precise-looking expected freight cost built on a guess is still a guess.

Check why the express shipment happened

In the opening example, the supplier is late. Real orders need a closer look.

Was the supplier late against the agreed date? Did planning bring demand forward? Did the buyer place the order after the agreed cutoff? Did quality hold the delivery? Each can create the same courier invoice, but each needs different work.

Link the invoice to the order and record the cause. Count it in the company result either way. Then assign the action to the team that can prevent it. Deducting every freight exception from a buyer's target, regardless of cause, would create another misleading measure.

This also keeps the cost calculation honest. If the courier prevented a line stop, count the courier. Don't add a hypothetical shutdown as though it happened too. Record disruption risks separately where they remain uncertain.

Change what counts as a saving

The comparison sheet helps before the order. The same logic needs to survive the monthly report.

Measure	What it tells the team
Quoted purchase price saving	What changed in the price for the agreed quantity
Expected net saving	What should remain after the costs expected to change
Realised net saving	What remained after actual costs and credits over the agreed review period
Delivery and quality performance	Whether the saving came with acceptable service

Keep the price saving visible. The buyer negotiated it, and it is useful information. Put the net result beside it so nobody has to discover the freight invoice three months later.

Before awarding the business, purchasing, planning, logistics and quality should agree the assumptions. Finance should agree the baseline and how costs will be counted. After the first few orders, review the result against those assumptions. If demand or specifications changed, explain that change rather than presenting the old comparison as like for like.

The review might show that B needs a firmer dispatch commitment, a different order schedule or a small stock buffer. Price negotiation can continue while the teams work on delivery. Paying more for the same uncertainty would solve nothing.

If extra stock is the proposed fix →Work out the buffer and its carrying cost before using inventory to cover unreliable deliveries.

The next time someone reports €200 saved, ask which order it belongs to and what happened after it was placed. Purchasing should get credit for savings that survive delivery. The company should be able to see when they don't.

Sources

• CIPS. Total cost of ownership. Cost categories and the effects of inventory, lead times and supplier performance.
• CIPS. Procurement and supply cycle. Supplier evaluation, agreed requirements and performance reviews.

The opening scenario, suppliers, order quantities and costs are fictional. The comparison sheet is a simplified model for this example. Add the costs and requirements relevant to your purchase.