Cost Containment

Four Year $50 Million Cost Containment Initiative

In June 2006, Purchasing Services launched a cost containment initiative to further leverage the institution's buying power and achieve $50 million in new cost containment over a four year period ending on June 30, 2010.

Building upon the success the past decade, and in support of the organization's Strategic Business Plan, Purchasing Services will strive to maximize new cost containment opportunities across the institution's supply chain. Formal cost containment criteria listed below is used to document legitimate savings results. In order to further challenge the organization, a cost containment stretch goal was established to achieve annual documented cost containment as a percentage of annual managed spend equal to the annual Consumer Price Index (CPI).

How Do We Determine Legitimate Cost Savings

Purchasing Services identifies and tracks legitimate cost savings through supply chain business strategies aimed at achieving "least total cost pricing" that takes into account not only price, but factors such as quality, service, delivery and all other aspects relevant for assessing the total value of the products and services required in support of the education and research mission of the institution. Purchasing Services will not allow the pursuit of cost savings be the sole determining factor in the selection of a product, supplier, or work method to meet the University's need. Therefore, it is essential that Purchasing Services meet those needs consistently with the best quality of products and services.

When reporting a new cost savings, Purchasing Services utilizes private industry acknowledged cost savings criteria to ensure that all reported savings are identifiable, measurable, and a direct result of the involvement of a purchasing representative in a transaction, project, or contract negotiations. New contract and project cost savings; cost avoidance, recurring savings, and revenue generation contribute to the organization's mission to produce significant Return-on-Investment (ROI) in support of the goals of the Office of the Executive Vice President. Reported cost savings are the result of a planned or deliberate action taken by a Purchasing Services staff member. A purchase cost savings or avoidance occurs when a lower than previously paid cost results in the purchase of the same, or comparable product or service.

This may be accomplished by a number of means including but not limited to:

• Reduce the purchase or ownership cost of the desired product or service
• Avoid a higher cost that would have otherwise occurred
• Improve the total value of a purchased product or service
• Strategic preferred contract supplier relationships
• Competitive bidding of annual requirements and spot purchases
• Spot buy transaction negotiation or addition bid solicitation
• Equivalent product substitution or standardization while meeting customer requirements
• Favorable contract terms and conditions
• Reduction or elimination of a new cost that would have otherwise occurred

Exclusions

Process or "soft dollar" savings are not reported in the Cost Containment Program. For multi-year supplier contracts, cost savings are only reported for the first year of the multi-year contract. The second year becomes the new cost baseline which may be renegotiated at a later time due to growth in the business relationship with Penn or other related opportunities. An unsolicited price reduction, caused by factors such as market conditions, does not qualify as a cost savings for which Purchasing Services can take credit. Cost savings and avoidance opportunities exist not only in what Purchasing Services does, but also in how we do it. Creditability of the reported cost savings is a critical success factor for the program.

Related Links

• Managed Spend
• Purchasing Cost Containment
• Travel Cost Containment
• Fuel Surcharges: Impact of Rising Fuel Costs
• Cost Savings Opportunities for Faculty & Staff