February 10, 2026 – Price discount and price avoidance usually are not new concepts, however the best way we apply them typically clouds the dialog between provide chain and finance. Most procurement tasks, as soon as carried out, comprise components of each – but for the sake of simplicity we sometimes label every initiative as one or the opposite. That simplicity could make inner monitoring simpler, but it surely makes coordination tougher as a result of it obscures what’s actually taking place.

Take a standard instance: sourcing renegotiates an present contract for sterile gloves, decreasing the unit value by 5%. On paper, that is a easy price saving. However the next yr, medical exercise will increase and glove use will increase by 10%. Whole expenditure will increase regardless that the unit value has decreased.

Have we ‘saved’ cash? Sure, and no.

There’s a discount part linked to the decrease unit value, and an avoidance part linked to what didn’t escalate additional due to that decrease price. Whole spend tells one story, however the classification of worth tells a unique story. When each results are lumped collectively as ‘financial savings’, the monetary trade sees a price line that will increase resulting from quantity and wonders how a lot of the reported financial savings is ‘actual’. When they’re separated (value impact versus quantity impact), the story turns into coherent. The maths can reconcile both manner, however the story can’t. Precision on this sense shouldn’t be about reaching a unique whole; it’s about bridging the hole between the sourcing group’s actions and the monetary interpretation of its impression.

As an example with easy numbers (these are for illustrative functions solely), if a facility beforehand bought 10,000 packing containers of gloves for $10 every ($100,000 whole), and the brand new contract reduces the worth by 5% to $9.50 per field, the anticipated worth of the buying occasion is $5,000. Now suppose that utilization grows by 10% to 11,000 packing containers. Bills improve to $104,500. The sourcing math nonetheless applies: we delivered a complete worth of $5,500, however whole spend elevated.

Click on right here to proceed studying the article “Why Precision Issues” within the newest situation of JHC.